1. ©2010 Pearson Education, Inc. Publishing as Prentice Hall

2. ACCOUNTING PERIODS AND METHODS (1 of 2)
Overall accounting methods
Inventories
Special accounting methods
Imputed interest
©2010 Pearson Education, Inc. Publishing as Prentice Hall

3. ACCOUNTING PERIODS AND METHODS (2 of 2)
Change in accounting methods
Tax planning considerations
Compliance & procedural considerations
©2010 Pearson Education, Inc. Publishing as Prentice Hall

4. ©2010 Pearson Education, Inc. Publishing as Prentice Hall
Accounting Periods
Fiscal year is any 12-month period other than calendar year
Partnerships, S corps, and PSCs
Generally must have same tax year as majority owners (>50% ownership)
Required payments and fiscal years
Changes in the accounting period
Returns for periods of < 12 months
©2010 Pearson Education, Inc. Publishing as Prentice Hall

5. Required Payments and Fiscal Years
C corporations, other than PSCs, can choose any fiscal year
Partnerships, S corps, and PSCs can choose a fiscal year if deferral is 3 months or less (§444 election)
Required payments must be made by April 15 to offset advantage of deferral from §444 election
©2010 Pearson Education, Inc. Publishing as Prentice Hall

6. Changes in the Accounting Period (1 of 2)
Generally need IRS approval to change accounting period
Must establish substantial business purpose to change accounting period
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7. Changes in the Accounting Period (2 of 2)
IRS approval not necessary
Conformity of newly married spouses
Change to 52/53 week year ending in same calendar month as prior tax year
Certain corporations which have not changed accounting periods within 10 years
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8. Returns for Periods of Less than 12 Months (1 of 2)
No annualization of income required
Taxpayer’s first or final return
Annualization required
Change from one accounting period to another
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9. Returns for Periods of Less than 12 Months (2 of 2)
Annualization procedure
Determine modified taxable income
Must use itemized deductions
No personal and dependency exemptions
Multiply modified taxable income by (12 ÷ # of months in short period)
Compute tax on resulting amount
Multiply resulting tax by (# of months in short period ÷ 12
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10. Overall Accounting Methods
Overall accounting method used in one trade or business not needed to be used in a second trade or business
Cash receipts and disbursements method
Accrual method
Hybrid method
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11. Cash Receipts and Disbursements Method (1 of 2)
Report income for the tax year in which payments are received
Generally deduct expenses in year paid
Prepaid expense capitalized and amortized if benefits extend beyond tax year
Must capitalize fixed assets and recover through depreciation or amortization
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12. Cash Receipts and Disbursements Method (2 of 2)
Most individuals and many service businesses use the cash method
Cannot use cash method in a business where inventory is material income producing factor
Small business exception – see hybrid method
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Accrual Method (1 of 2)
Report income under all-events test and economic performance test
All events test
Taxpayer’s right to receive income & amount determined w/reasonable accuracy
Economic performance test
Property or services actually rendered by other party
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Accrual Method (2 of 2)
Deduction is met when liability established and amount of expense can be determined with reasonable accuracy
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Hybrid Method
Use accrual method for sales and purchases, but may use cash method for other income and expenses
Small business exception
Businesses with inventory whose annual gross receipts for 3 prior years ≤ $1M may use cash method for sales and accrual method cash method for cost of goods sold
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Inventories (1 of 2)
Use lower of cost or market
If using LIFO for tax
Must also use LIFO for financial accounting
May use lower of cost or market
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17. ©2010 Pearson Education, Inc. Publishing as Prentice Hall
Inventories (2 of 2)
Uniform capitalization rules (UNICAP)
Required for taxpayers whose average gross receipts for 3 prior years >$10M
Must capitalize some period costs
Cycle inventory valuation
Congress specifically permits method
Inventory counted following a schedule
©2010 Pearson Education, Inc. Publishing as Prentice Hall

18. Special Accounting Methods
Long-term contracts
Installment sales method
Deferred payment sales
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19. Long-Term Contracts In General
For items that are not completed in same tax year in which they begin
For manufacture of unique item not normally carried in finished goods inventory
Services not eligible for long-term contract methods
©2010 Pearson Education, Inc. Publishing as Prentice Hall

20. Long-Term Contracts Completed Contract Method
Income and expenses reported in year contract completed
Only available in two circumstances
Small companies w/avg gross receipts for prior 3 years is ≤ $10M for contracts AND
Construction contracts expected to take < 2 years, or home construction
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21. Long-Term Contracts Percentage of Completion Method
Income and expenses reported in each year of contract based on estimated percentage of completed work
Modified percentage of completion
Income deferred until 10% of estimated cost accumulated
©2010 Pearson Education, Inc. Publishing as Prentice Hall

22. Installment Sales Method (1 of 3)
Any disposition of property where at least one payment received after close of tax year of disposition
Elective provision
Not applicable for sale of
Inventory
Marketable securities
©2010 Pearson Education, Inc. Publishing as Prentice Hall

23. Installment Sales Method (2 of 3)
Disposition of installment obligations
Gain = [selling price] – [adjusted basis of installment note]
Adjusted selling price = [face value] x [100% - gross profit percentage]
©2010 Pearson Education, Inc. Publishing as Prentice Hall

24. Installment Sales Method (3 of 3)
Computation under §453
Compute gross profit from sale
Determine contract price
Compute gross profit percentage
Gross Profit ÷ Contract Price
Compute gain to be reported
Proceeds X Gross Profit Percentage
Depreciation recapture recognized in year of sale
©2010 Pearson Education, Inc. Publishing as Prentice Hall

25. Deferred Payment Sales
Installment method cannot be used when property sold at a loss
Obligations with indeterminate market value
E.g., mineral interest sold for 10% of value of future production
Value no lower than value of property sold less value of other property received
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Imputed Interest
Imputed interest computation
Generally must be at least 100% of applicable federal rate
Accrual of interest
Generally reported as it accrues
Several major exceptions
Special rules for gift, shareholder, and other tax avoidance loans
©2010 Pearson Education, Inc. Publishing as Prentice Hall

27. Change in Accounting Methods (1 of 2)
Accounting period chosen by using for first year in which it is applicable
IRS approval required to change methods
May change to LIFO method without IRS approval
Amount of change
Due to timing of income and deduction recognition due to changes between cash and accrual methods
©2010 Pearson Education, Inc. Publishing as Prentice Hall

28. Change in Accounting Methods (2 of 2)
Reporting the amount of the change
The amount
Change voluntary or involuntary
Any specific statutory mandates
Obtaining IRS consent
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29. Tax Planning Considerations
Accounting periods
Consider year end and marginal tax rate in initial year
Accounting methods
Installment sales
Consider marginal tax rate and amount of gain to decide whether or not to elect out of installment method
©2010 Pearson Education, Inc. Publishing as Prentice Hall

30. Compliance & Procedural Considerations
Installment Sales reported on Form 6252
Procedures for changing to LIFO
Advanced IRS permission required except for first year inventory carried
Form 970 in 1st year using LIFO
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31. ©2010 Pearson Education, Inc. Publishing as Prentice Hall