1. The year would be closing in the middle of the ski resort’s busy season. Profits can best be determined by taking into account all of the revenues and expenses for an entire season, rather than for parts of two seasons.

2. The calendar 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 (or cost recovery allowances are claimed) over their depreciable lives.
b. Prepaid rental income must be included in gross income in the year of