Enrolled Agent > EA - Part 2: Businesses > Unit 2: Accounting Periods and Methods > Flashcards

Unit 2: Accounting Periods and Methods Flashcards

Know how businesses choose and change accounting periods and methods. (65 cards)

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1
Q

What is a calendar tax year?

A

A twelve consecutive month period beginning January 1 and ending December 31.

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2
Q

What is a fiscal tax year?

A

A twelve consecutive month period ending on the last day of any month except December.

A fiscal tax year can also be a 52/53-week tax year that does not have a fixed end date.

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3
Q

What is a short tax year?

A

A tax year of less than 12 months.

A short tax year may occur in the first or last year of an entity’s existence, or when an entity changes its accounting period.

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4
Q

When must a business use the calendar year?

A
  • If the business keeps no books or records.
  • There is no annual accounting period.
  • The Internal Revenue Code or IRS regulations require the use of a calendar year.
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5
Q

What form is used to request a change in tax year?

A

Form 1128, Application to Adopt, Change, or Retain a Tax Year.

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6
Q

What are the executor’s responsibilities after a taxpayer’s death?

A
  • File the decedent’s final income tax return (Form 1040)
  • File income tax returns for the estate (Form 1041)
  • Possibly file an estate tax return (Form 706)
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7
Q

When is Form 1041 due?

A

The fifteenth day of the fourth month following the end of the entity’s tax year.

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8
Q

What is the required tax year for partnerships?

A

It must conform to its partners’ tax years unless a legitimate business purpose for a different tax year is established.

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9
Q

What is the required tax year for S corporations?

A

Generally, a calendar year ending December 31.

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10
Q

What is a ‘natural tax year’?

A

A fiscal year in which the last two months of the year provide over 25% of the business’s gross receipts for the entire year.

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11
Q

What is a Section 444 election, and what are the requirements to make one?

A

A Section 444 election allows certain partnerships, S corporations, and personal service corporations to adopt a tax year other than the required tax year, provided they meet specific rules:

  • The entity is not a member of a tiered structure.
  • The entity has not previously had a section 444 election in effect.
  • The entity elects a year that meets the deferral period requirement.
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12
Q

What are the conditions under which a section 444 election ends automatically?

A
  • The entity changes to its required tax year
  • The entity liquidates
  • The entity becomes a member of a tiered structure
  • The IRS determines that the entity willfully failed to comply with the required payments or distributions
  • The entity is an S corporation, and the S election is terminated
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13
Q

When are partnership and S corporation returns due for calendar-year entities?

A

March 15

Returns are due on the fifteenth day of the third month following the end of the year.

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14
Q

What is the filing due date for C corporations using a calendar year?

A

April 15 of the following year

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15
Q

What is the regular due date for corporations with a June 30 fiscal year-end?

A

September 15

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16
Q

When are nonprofit entities using a calendar year required to file their information returns?

A

By May 15

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17
Q

Can an extension of time to file federal income tax returns extend the time to pay the tax due?

A

No

The tax due must be paid by the filing deadline, or the entity will be subject to interest and penalties on the amount of unpaid tax.

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18
Q

What accounting methods can businesses generally use to report taxable income?

A
  • Cash method
  • Accrual method
  • Special methods of accounting for certain items of income and expenses
  • Hybrid method
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19
Q

Which businesses are required to use the accrual method of accounting?

A
  • A C corporation, or a partnership with a C corporation partner, with average annual gross receipts exceeding $31 million
  • Any tax shelter, regardless of its size

An exception is for a C corporation that is a Personal Service Corporation (PSC). A PSC may generally use the cash method regardless of the amount of its annual gross receipts.

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20
Q

What is the 12-month rule for prepaid expenses?

A

Under this rule, the cash-basis taxpayer is not required to capitalize amounts paid for periods that do not extend beyond the earlier of:

  • 12 months after the benefit begins, or
  • The end of the tax year after the tax year in which payment is made.
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21
Q

Under the cash method, when is income considered constructively received?

A

When the amount is credited to the taxpayer’s account or made available without substantial restriction so that the taxpayer (or their agent) can access the funds.

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22
Q

What is the accrual method of accounting?

A

Under this method, a business reports income when it is earned, regardless of when payment is received. Expenses and costs are recognized when they are incurred—either deducted as expenses or capitalized as assets—once all events have occurred to fix the liability, the amount can be determined with reasonable accuracy, and economic performance has occurred.

This is known as the ‘all-events’ test.

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23
Q

What must a business do to change its accounting method?

A

File Form 3115, Application for Change in Accounting Method, and obtain IRS approval unless the change is automatic.

Automatic changes do not require prior consent but must still be requested on Form 3115.

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24
Q

What is the hybrid accounting method?

A

A method that combines the cash method, accrual method, and other special methods, provided it clearly reflects income and is used consistently.

The hybrid method has specific restrictions, such as using the accrual method for purchases and sales if inventory is necessary and the business does not qualify as a small business.

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25
What are the **uniform capitalization** (UNICAP) rules?
Rules that provide guidance regarding the direct costs and certain indirect costs related to the production of goods or the purchase of merchandise for resale that businesses must capitalize as part of the cost of inventory. ## Footnote The Tax Cuts and Jobs Act exempts certain businesses from these rules, particularly those meeting the $31 million gross receipts test.
26
What are **examples** of costs not subject to UNICAP rules?
* Research and experimental expenditures * Marketing or advertising costs * Intangible drilling and development costs * Qualified creative expenses for self-employed writers, musicians, or artists ## Footnote These exemptions apply regardless of the business's size.
27
What items are **never included** in inventory?
* Goods sold where legal title has passed * Goods consigned to the business * Goods ordered for future delivery without legal title * Land, buildings, and depreciable equipment used in the business ## Footnote These items should not be part of inventory calculations.
28
What is required for a business to **switch** from cash to accrual accounting?
File Form 3115 and obtain IRS approval unless the change is mandated by law. ## Footnote A required change, such as when a business's average gross receipts exceed $31 million, is an automatic change.
29
What **costs** are included in the calculation of **Cost of Goods Sold** (COGS)?
* Materials used for production * Direct labor costs * Manufacturing overhead * Cost of merchandise
30
What is the **formula** for calculating **Cost of Goods Sold** (COGS)?
Beginning Inventory + Purchases in the Current Period − Ending Inventory ## Footnote Cost of goods sold are the applicable costs attributable to the production (or purchase) of the goods sold by a business.
31
What do the shipping terms **FOB Destination and FOB Shipping Point** indicate?
* FOB Destination: Title passes to the buyer at the point of destination. * FOB Shipping Point: Title passes to the buyer at the point of shipment. ## Footnote These terms dictate when a taxpayer must take an item out of its inventory and recognize income from a sale.
32
What are the **common inventory methods** accepted by the IRS?
* Specific Identification Method * Average Cost Method * FIFO (First-in, First-out) * LIFO (Last-in, First-out) ## Footnote The value of a business's inventory is a major factor in figuring taxable income.
33
Which inventory method assumes that inventory items are **sold in the order they are acquired**?
FIFO (First-in, First-out)
34
Which inventory method assumes that the **newest inventory is sold first**?
LIFO (Last-in, First-out)
35
What must a business do to **change its inventory method** according to the IRS?
Obtain prior IRS consent by filing Form 3115, Application for Change in Accounting Method.
36
In periods of inflation, how do FIFO and LIFO **affect** the cost of goods sold and inventory value?
* FIFO: Lower cost of goods sold, Higher value of inventory * LIFO: Higher cost of goods sold, Lower value of inventory
37
When is the **Specific Identification Method** most useful?
When it is possible to identify and match the actual cost to specific items in inventory, usually when the inventory consists of a limited number of unique, high-value items.
38
What is the **effect** of LIFO during periods of rising prices?
* Higher cost of goods sold * Lower closing inventory ## Footnote LIFO, or Last-In, First-Out, records the sale of the most expensive inventory first, which decreases profit and reduces taxes.
39
How does FIFO **affect** inventory and cost of goods sold during periods of falling prices?
* Lower value of inventory * Higher cost of goods sold
40
What costs are included in the **inventory valuation** under the cost method?
* All direct and indirect costs of producing and purchasing the inventory * Invoice price minus discounts * Transportation or other acquisition charges * Costs capitalized under uniform capitalization rules
41
When using the cost method, how should **trade discounts** be handled?
The cost of the actual value of inventory must be reduced by trade discounts.
42
What is the '**lower-of-cost or market**' method used for?
Inventory that tends to lose value quickly, such as seasonal clothing or pharmaceuticals. ## Footnote To value inventory using this method, compare the cost and the FMV of each item in inventory and choose the lower of the two for the inventory's value.
43
The **lower-of-cost or market** method applies to:
* Goods purchased and on hand. * The basic elements of cost of goods—direct materials, direct labor, and certain indirect costs—for goods being manufactured, as well as finished goods on hand.
44
What does the **retail inventory** method estimate?
The ending inventory balance by applying an average markup percentage to the total retail selling price.
45
What is **inventory shrinkage**?
Lost, stolen, or damaged inventory that reduces a business’s ending inventory and increases COGS.
46
How can a business record a **casualty or theft loss** of inventory?
* Adjust its cost of goods sold * Record the loss separately as a casualty or theft loss
47
What should a business do if it expects **insurance reimbursement** for a theft loss?
It should not claim a loss to the extent it has a reasonable prospect of recovery.
48
Which businesses can adopt a **fiscal year**?
Any form of business entity may adopt a calendar year, but only a new C corporation may generally choose any fiscal year.
49
When are **partnership and S corporation returns** due?
On the fifteenth day of the third month following the end of the year. ## Footnote For calendar-year partnerships and S corporations, returns are due March 15.
50
Under the **cash method**, when can a taxpayer generally **deduct expenses**?
When they are paid. ## Footnote A business cannot lower its taxable income by paying expenses applicable to future years; such costs must be capitalized and deducted in the applicable years.
51
What is the **due date** for filing **Form 1041** for trusts and fiduciary returns?
**April 15**, with an **extended** due date of September 30. ## Footnote This applies to trusts filing on a calendar year basis.
52
What **accounting method** is most commonly used by small businesses?
The cash method. ## Footnote The cash method is simpler and is permitted for small business taxpayers meeting the gross receipts test.
53
What happens if the **due date** for filing tax returns falls on a weekend or legal holiday?
The deadline is extended to the **next business day**. ## Footnote This extension applies to all types of returns, including those of dissolving entities or those filing for extensions.
54
What is the **all-events test** for deducting expenses under the accrual method?
An expense is deducted when all events have occurred to fix the liability with reasonable accuracy and economic performance has occurred with respect to the liability.
55
What are the requirements for a business to use a **hybrid accounting method**?
* The method must clearly reflect income. * It must be used consistently. * If inventory is necessary and the business is not a 'small business,' the accrual method must be used for purchases and sales.
56
When is IRS prior approval required for **changing accounting methods**?
* Changes from cash to accrual or vice versa, unless required by law. * Changes in the method used to value inventory. * Changes in the method of depreciation or amortization.
57
What are the criteria for a small business to be exempt from the **UNICAP rules** under the Tax Cuts and Jobs Act?
The business must meet the $31 million gross receipts test in 2025.
58
What is included in a taxpayer's **inventory** under the UNICAP rules?
* Merchandise or stock in trade. * Raw materials, work in process, finished products. * Supplies that physically become a part of items for sale.
59
Which businesses are not subject to **UNICAP**, regardless of gross receipts?
* Small businesses with average annual gross receipts of $31 million or less in 2025. * Sellers of personal-use or nonbusiness property. * Research and experimental expenditures. * Intangible drilling and development costs of oil and gas or geothermal wells.
60
What are **indirect costs** associated with the production process?
* Electricity * Equipment depreciation * Rent for a factory or storage facility
61
What does **COGS** include for certain businesses under the UNICAP rules of IRC §263A?
COGS includes all direct costs needed to produce a product for sale, and certain indirect costs must also be included.
62
How is the **average unit cost** calculated under the Average Cost Method?
Average Unit Cost = (Cost of Units Purchased or Manufactured) / (Total Quantity of Units)
63
What is the IRS requirement for stock sales using **FIFO**?
If the buyer cannot identify which shares they sold, FIFO must be used to allocate the sale to the shares purchased earliest.
64
# True or False: The **lower-of-cost or market** method can be used in conjunction with the LIFO method.
False
65
# Fill in the blank: Theft losses are deductible by a business in the year of _\_\_\_\_.
discovery
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