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REG 1B +1C

Terms in this set (26)

State Board of Accountancy
Offers CPA exam, issues CPA license, maintains standards of practice for CPAs under their jurisdiction
Adopting a Tax Year
TP adopts tax year by filling his/her first income tax return by the due date
- TP can't adopt a tax year by merely filing an application for an extension, filing for an EIN, or by paying estimated taxes
Tax year
An annual accounting period for keeping records and reporting income and expenses
Adopting an Accounting Method
- set rules used to determine when income and expenses are reported on the tax return
- to change accounting method --> must get IRS approval
Cash Method of Accounting
TP that have average annual gross receipts of 25 million or less during the preceding 3 years aren't required to account for COGS using inventories
- not required to use accrual method
- can treat inventories as non-incidental materials/supplies OR conforms to the TP financial accounting treatment of inventories
Entities prohibited from using cash method
- corporation (other than S corporation) with average annual gross receipts exceeding 26 million
- a partnership with a corporation (other than S corp.) as a partner, with average annual gross receipts exceeding 26 million
Exception for allowance of cash method
- qualified personal service corporation
- TP engaged in farming
Methods for valuing Inventories
under cost method, TP must include all direct and indirect costs associated iwh it
Merchandise on hand - Beginning tax year
cost = EI price of the goods
Merchandise Purchased - During the year
cost =
Invoice
- appropriate discounts
+ transportation or other charges incurred acquiring the goods
Merchandise produced - during the year
cost = direct and idirect costs that have to be capitalized under the uniform capitalization rules
Acceptable inventory methods include:
FIFO, LIFO, cost, LCM, or retail method
Accrual Method of Accounting
Reports income in the year earned and deducts or capitalizes expenses in the year incurred
Purpose of accrual method
To match income and expenses in the correct year
TP reports an amount in the TP's gross income on the earliest of the following dates
- when TP receives payment
- when the income amount is due to TP
- when TP earns the income
- when title has passed
Expenses Paid in Advance
TP can't deduct expense that are paid in advance, even if TP pays in advance

Applies to both cash and accrual methods

(expenses such as insurance are generally allocable to a period of time, which means that a TP can deduct insurance expenses for the year to which they're allocable)
Deducting Bad Debts
Accrual method - TP reports income when earned, TP CAN take bad debt deduction for amounts owed to them bc amount was included in income previously

Cash method - TP generally reports income when payment is received; TP can't take bad debt
Deducting Taxes
TP can only deduct taxes in the year the taxes are paid regardless of cash or accrual method

- deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare
- some taxes aren't deductible
Cap on deduction of SALT
$10,000
Tax on increasing value of TP property
Can't deduct taxes charged for local benefits and improvements
LLC
An entity formed under state law and none of the members are personally liable for its debts
LLC Federal classification
May be classified as partnership, a corporation, or an entity disregarded as an entity separate from its owner if it has only one owner
Domestic LLC - Federal
at least two members; doesn't file an election to be a corporation will be a partnership
Conversion of Partnership to LLC
- doesn't terminate the partnership
- LLC can continue to use the partnership's TP identification number
- may change some of the partners' bases in their partnership interests if the partnership has recourse liabilities that become nonrecourse liabilities
EIN
TP must have EIN to use as a TP id number if TP pays wages to one or more employees or files pension or excise tax returns
Not Operated for Profit
TP cannot use a loss from the activity to offset other income (wages and salaries)

TP can't use a loss from the activity to offset other income, which would include wages and salaries that the TP receives

Activities done as a hobby - not entered into for profit
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