...13 chapter TAX ACCOUNTING OBJECTIVES After completing Chapter 13, you should be able to: 1. List what are permissible tax years. 2. Explain the requirements for changing a tax year. 3. Identify the available accounting methods. 4. Understand the rules for accounting method changes. 5. Account for the capitalization of inventory costs. 6. Describe long-term contract reporting. 7. Defi ne the installment method of accounting. 13–2 CCH FEDERAL TAXATION—COMPREHENSIVE TOPICS OVERVIEW The fi rst 12 chapters are presented primarily from the individual taxpayer’s point of view (including self-employed taxpayers). This chapter provides a general discussion of the previous material as it applies to other entities and provides a discussion of accounting periods and accounting methods as they apply to all entities. Discussions of specifi c provisions as they apply to other entities (e.g., corporations, partnerships, etc.) are contained in subsequent chapters. The term “fi nancial accounting” refers to the reporting of the fi nancial data of an enterprise through fi nancial statements prepared in accordance with generally accepted accounting principles. Income tax accounting, hereafter referred to as “tax accounting,” is concerned with the reporting of fi nancial data to satisfy the requirements of the Internal Revenue Code, the Regulations which interpret the Code, rulings by the IRS which further interpret the Code and Regulations, and the decisions of the courts...
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...Analytical Essay # 1 Dear Mr. Smythe, We have received your request to review your current tax situation involving action by the IRS and are happy to provide you advice based on our opinion of your particular situation. Based on the information you have provided us, it is our understanding that during the tax year 2009, you received dividend and interest earnings totaling $10,000 from a margin account you mantained at Investit Investment Company and which was comprised of both stocks and bonds. It is also our understanding that shortly after the earnings were paid to your margin account they were redistributed and used for reinvestment purposes with no funds being withdrawn from the account. The account remained in this position through the balance of 2009 and was subsequently liquidated and closed in 2010. It is also our understanding that you had received an IRS form 1099-DIV in 2009, listing the $10,000 received in the margin account as dividend and interest income earned and recieved in 2009, however you declared the amount in your 2010 income when you choose to close the margin account and take physical possession of the money. Further, it was decided by the IRS that that income was incorrectly declared by you in 2010 and should have been reported under your 2009 income and applicable tax paid at that time. This has resulted in an action taken by the IRS in which additional penalties and interest have been assessed on you. To assist you in understanding your...
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...Introduction As far as we know, the corporation tax rate in United State of America is high. It is one of the highest corporation rates in the developed world which reach to 35%. In order to reduce the tax burden and make them more profitable, more and more American corporations choose to stash their cash overseas, since the developing countries such as China use tax incentives to attract foreign firms to support economic growth. Launching business in the developing countries become the strategy help foreign firms to increase their after-tax returns. For example, General Electric keeps only 30.7 billion of its 85.5 billion in cash reserves in the U.S., while intends to invests more than 1.5 billion in joint ventures with Chinese state-owned companies in “key high-technology sectors”. The purpose of the paper is to present the forms of foreign investment enterprises can be taken in China and the different tax incentives are used to induce foreign investment enterprises, then to analyze their influence on selection of a particular form of FIE. Body China developed one of the biggest market in the world and is attracting more and more global investors to move into China's market. It is necessary for foreign investor to understand all the potential tax costs would be incurred in China before making an investment decision in order to operate business in a most efficient way. Learning the regulation of taxation is the first step for foreign investors who decide to invest in China...
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...Tax Law and Accounting University of Phoenix/ACCT 483 July 20, 2009 Tax Law and Accounting The history and time line of federal, state, and local tax systems within the United States follows events in history that have shaped the current tax laws of today. Today the law is almost inconceivable with so many interpretations and loopholes. In today’s business world not only are companies governed by federal income tax laws, but also accounting guideline established by the national framework of generally accepted accounting principles (GAAP). Due to the complexity of the guidelines and tax laws, many questions arise with regard to the interpretations. Taxpayers may ask are the practices used to reduce taxes, tax avoidance, or tax evasion. History of Income Tax Income taxes can be traced through history, in colonial times; individual taxpayers had nothing to do with the federal taxing authorities. The government, instead, received income from excise taxes, tariffs, and custom duties. Prior to the Revolutionary War, colonies held more responsibility; therefore, needing greater access to revenues. Post Revolutionary War, in 1781, the Articles of Confederation was adopted. The article gave full rights to each State as an entity allowing the state to levy tax as each state saw fit. The idea of central government was still strongly rejected [ (Unknown, n.d.) ]. In 1789, the Constitution was adopted. At this time in history, the governing powers recognized that a need for resources...
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...In this case Jonathan who owns a sole proprietorship has transferred business assets of $1 million to a new corporation. He also transferred $325,000 of debt and adjusted basis of $200,000. Jonathan has no taxable gain or loss; he is justified in the extent that he is under section 351. The rule for section 351 is that no gain or loss should be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation. In this case, Jonathan is receiving stock from the corporation, like the rule states. However under section 357(a), the liability assumed by the acquiring corporation is not boot to the transferor. Also under this rule, another party in the exchange has to assume liability of the taxpayer, which still applies to Jonathan. The fact that the corporation has assumed the liabilities does not make it a taxable event. Section 357 (b) does not apply to Jonathan, but section 357 (c) does. Under 357(c), if the sum of the amount of the liabilities assumed exceeds the total of the adjusted basis of the property transferred, then the excess should be considered as a gain from the sale or exchange and is a taxable gain. This changes everything because this applies to Jonathan considering he came out ahead by $125,000, $325,000 was assumed and the adjusted basis was only $200,000. If there were no excess then Jonathan wouldn’t have...
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...CHAPTER 3 * (F) Currently, the top Federal income tax rate in effect is the highest it has ever been. -The income tax rate in effect in 1944-1945 ranged from 23% to 94%. * (T) As used in the income tax formula, gross income would not include the receipt of a loan the taxpayer obtained from a bank. -Borrowing money does not result in gross income. * (F) Under the income tax formula, a taxpayer must choose between deductions for AGI and the standard deduction. -The choice is between deductions from AGI and the standard deduction. * (T) An “above the line” deduction refers to a deduction for AGI. * (F) Because they appear on page 1 of Form 1040, itemized deductions are also referred to as “page 1 deductions.” -What is described are deductions for AGI. Itemized deductions are also known as deductions from AGI and appear on page 2 of Form 1040. * (T) Most exclusions from gross income are not reported on Form 1040. -Gifts and inheritances are two major exclusions not reported on Form 1040. * (F) Once TI (taxable income) is determined, the taxpayer must make a choice between itemizing or --claiming the standard deduction. -The choice must be made after determining AGI (not TI). * (F) The filing status of a taxpayer (e.g., single, head of household) need not be identified until after taxable income is determined. -The filing status is relevant in determining the amount of the standard deduction available. * (F) Kim, a resident of Korea, is a citizen of the...
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...Tax Law and Accounting ACC/483 Income Tax Accounting The first step to understanding taxes is to first understand why we have taxes in the first place. As citizens many people take for granted what benefits we gain from the government developing the country around us. The various infrastructures, public systems, education, and the very safety of the citizens in a country are all affected by government funds. People generally are unable to pay for these services directly out of their own pockets, so the government provides for the care of its citizens out of its own funds. As most people know, the United States tax system is special in that citizens generally can pay taxes to a variety of levels: federal, state, and even city taxes depending on where you live. Regardless of whom you pay taxes to, or if you live in the United States or in some other country around the world, the objective of income taxes still remains the same. Just as was mentioned in the previous paragraph, taxes are used to fund various government activities that affect the citizens of a country throughout their everyday life. Income taxes provide a way to ensure that the government is able to collect revenue from its citizens efforts at a variety of governmental levels to provide proper care and service for its people and keep the country running. After understanding why taxes are important, another important aspect to understand...
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...energy operations pursuant to an operating or consortium agreement under a service contract with the government. 3. A. Domestic Corporation Generally, corporations in the Philippines are required to pay income tax of 32 percent of taxable income from sources both within and outside of the Philippines. However, the president may, with the recommendation of the secretary of finance, give corporations the option to pay a tax of 15 percent on gross income. Corporations that choose this option may not switch back for three years. B. Resident (Foreign) Corporation A resident foreign corporation is one organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines. C. Non-Resident Corporation The term applies to a foreign corporation not engaged in trade of business in the Philippines. 4. 3 Categories of income subject to tax of the Domestic Corporation. How are they paid? Category A – Capital gain with a capital gain tax of a. 5% and 10% b. 6% The tax in (a) is due within 30 days from the date of sale. The tax in (b) is withheld at source. (installment payment/ withholding under certain conditions). Category B – Passive income with final tax: a. 7 ½% b. 20% The tax is withheld at a source. The income received is...
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...ACCOUNTING FOR INCOME TAX Aylin Alishahi University of Houston - Victoria Abstract The main idea of this paper is to introduce the concept of Accounting for Income Tax. As part of our discussion, we will understand the meaning of Income Tax and Tax Accounting. We will also look into the different terminologies of GAAP and IRS and the differences between the two. There are two basic kinds of differences between the two – temporary and permanent. In addition to looking at the basic kinds of differences, we will also look into Net Operating Losses. Examples have been provided for all the concepts to better understand the idea behind the concept. Although, this paper does not provide the detailed explanation, it will help us understand the overview of the whole theory. Keywords: Income Tax, Tax Accounting, Accounting for Income Tax, Temporary Differences, Permanent Differences, Net Operating Losses. ACCOUNTING FOR INCOME TAX Income Tax and Tax Accounting Income Tax is defines as “A tax that governments impose on financial income generated by all entities within their jurisdiction”. It is required by the law that businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund. Income tax is a key source of funds that the government uses to fund its activities and serve the public. Tax Accounting is defined as “Accounting methods that focus on taxes rather than the appearance of public financial statements”...
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...Tax accounting firms focus on the rules and regulations that the Internal Revenue Code mandates. These regulations are used to help individuals and companies to process in preparing their tax documents. Standard accounting methods differ from what tax methods are allowed to be used when preparing tax returns. These tax accounting firms focus on understanding by keeping up to date on the latest rules and codes to be used for international, federal, state and local tax laws when preparing yearly returns. To work as a tax accounting employee, most firms require an individual to hold a bachelor degree in accounting, some require a master’s degree in accounting or taxation. While working in this field, the individual will be able to file reports with United States Securities and Exchange Commission, and the tax return professional must hold a certificate showing they are a Certified Public Accountant by their states board. Some firms or businesses that focus on preparing tax returns offer their own tax courses for their employees and affiliates. To name a few job titles that you will find within this area of tax accounting firms will be: a tax accountant, senior tax accountant, tax manager, tax director, tax research manager, tax supervisor, certified income tax preparer (CTP), certified public accountant (CPA), or even a licensed tax consultant. International Financial Reporting Standards will greatly impact tax firm preparers. “It will be important for tax return preparers to understand...
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...year shareholders of the S corporation would defer the income earned by the S corporation from February 1 until December 31 each year until the following calendar year. 3. The ideal tax year would end on January 31, and the salary would be paid each January. Thus, in 20X7 the corporation could pay $25,000 salary, which would eliminate the corporation’s taxable income. The medical doctor would report salary of $25,000 for 20X7. For the fiscal year ending January 31, 20X8, the corporation would pay $300,000 salary in January 20X8, and that would be the doctor’s salary income for the calendar year 20X8. If the corporation used the calendar year to report income and paid the salary in December, the doctor would have $300,000 salary income in 20X7 and in 20X8. Thus, as compared to using a calendar year, the doctor will always have $275,000 of deferred income by using a fiscal year. 4. Pale Motel, Inc., an S corporation, will be required to switch to a calendar tax year effective May 1, 20X7, unless it can demonstrate a business purpose for the fiscal year which will satisfy the IRS. This will result in an annualization of income calculation. 5. The cash basis taxpayer can deduct the premiums of $24,000 in 20X7 because the prepayment does not extend beyond the end of the succeeding tax year (i.e., one-year rule for prepaid expenses). 6. a. Fixed assets are accounted for in the same manner by both cash and accrual basis taxpayers. They are capitalized and depreciated...
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...Comprehensive Problems 61. Back in Boston, Steve has been busy creating and managing his new company, Teton Mountaineering (TM), which is based out of a small town in Wyoming. In the process of doing so, TM has acquired various types of assets. Below is a list of assets acquired during 2012: Asset Cost Date Place in Service Office furniture $10,000 02/03/2012 Machinery 560,000 07/22/2012 Used delivery truck* 15,000 08/17/2012 *Not considered a luxury automobile, thus not subject to the luxury automobile limitations During 2012, TM had huge success (and had no §179 limitations) and Steve acquired more assets the next year to increase its production capacity. These are the assets acquired during 2013: Asset Cost Date Place in Service Computers & Info. System $40,000 03/31/2013 Luxury Auto† 80,000 05/26/2013 Assembly Equipment 475,000 08/15/2013 Storage Building 400,000 11/13/2013 †Used 100% for business purposes. Use 2012 limitations for 2013. TM generated taxable income in 2013 before any §179 expense of $732,500. Required a. Compute 2012 depreciation deductions including §179 expense (ignoring bonus depreciation). b. Compute 2013 depreciation deductions including §179 expense (ignoring bonus depreciation). c. Compute 2013 depreciation deductions including §179 expense, but now assume that Steve would like to take bonus depreciation. d. Ignoring part c, now assume that during 2013,...
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...The goal of tax planning is to minimize taxes is not a true statement. The goal of tax planning is t maximize the taxpayer's aftertax wealth while simultaneously achieving the taxpayers non-tax goals. 3. Timing strategy exploits the variation in taxation across time. Income shifting strategy exploits the variation in taxation across taxpayers. Conversion strategy exploits the variation in taxation across activities. 7. The factors that the benefits of accelerating deductions are higher tax rat, higher interest rats, larger transaction amounts, and the ability to accelerate deductions by two or more years. The factors the increase the benefits of deferring income are higher tax rates, higher rates, larger transaction amounts, and the ability to defer revenue recognition for longer periods of time. 10. If an investor can earn a positive return, $1 invested today should e worth $1.05 in one year, 17. Paying dividends is not an effective way to shift income from a corporation to is owners because corporations do not get a tax deduction for dividends paid, paying dividends is not an effective way to shift income. Paying dividends results in double taxation. 22. The constructive receipt doctrine limits income deferral for cash-method taxpayer. 24. Related party transactions receive more IRS scrutiny because each transacting party negotiates for his or her own benefits. 25. Business purpose doctrine allows the IRS to challenge and disallow business expenses for...
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...Title: Role of accounting on business behaviors impacted by tax changes in Malaysia Justification There are many factors influence the changes of accounting importance where the role of accounting evolves along with the business changes affected by these factors. One of the factors that affect role of accounting in business field is tax. In Malaysia, Tax is generally divided into 2 types which are direct and indirect tax. Direct tax can be defined as tax which is imposed straight to the taxpayer. In short, the payment of tax is between taxpayer towards government. Examples of direct tax are income tax from employee salary, corporation tax, property tax, and etc. Meanwhile, indirect tax is a type of charge that can be transferred to the other person. A good example of indirect tax is restaurant that collect tax charge of the food’s sold from the customer (sales tax). Other examples of indirect tax are custom duty, central excise duty, and service tax). In brief, the history of Malaysia tax was started with more dependency towards indirect tax where establishment of direct tax has only started to take effect from 1 January 1948. This establishment has changed the trend of Malaysia tax which depends more and more on direct tax until today. In 2009 itself, government revenue has grown to 48.6% from direct tax. The urgency of understanding changes in accounting role due to tax, become important because of several reasons. Firstly, as the globalization of the economy develops...
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...How Technology Has Changed Tax Accounting How Technology Has Changed Tax Accounting The profession of tax accounting has been around for almost a century with the ratification of the 16th Amendment in 1913, which allowed the United States Federal Government to levy taxes on individuals’ income (Rettig, 2006). At that time, the tax laws were fairly simple and most people could complete their tax returns and the required calculations without the help of an accountant. Since then, the tax laws have increased so vastly in number and complexity that the average person cannot understand the laws enough to prepare their own return without assistance. This may come in the form of a tax accountant or software that walks the taxpayer through various rules that may apply to them. This paper focuses on how technology has changed the tax accounting profession throughout the years, highlighting the various innovations that have had the most significant impact. First, I will focus on how technology has changed the various aspects of tax accounting from recruiting clients and communicating with them, to filing completed tax returns and interacting with the Internal Revenue Service. Following, I will describe what tax accounting is likely to look like in the future due to some of the latest technological advances. Finally, I will summarize the major changes in the tax accounting profession over the years, and how tax accounting will continue to evolve moving forward. ...
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