Question & Answer

] Compare and contrast how bad debt expense is determined for financial accounting purposes and how the deduction for bad debts is determined for accrual-method taxpayers. How do cash-method taxpayers determine their bad debt expense for accounts receivable?

On December 31 of the current year, a taxpayer prepays an advertising company to provide advertising services for the next 10 months. Using the 12-month rule and the economic performance rules, contrast when the taxpayer would be able to deduct the expenditure if the taxpayer uses the cash method of accounting versus if the taxpayer uses the accrual method of accounting. 

Describe when economic performance occurs for the following expenses:

a)Workers’ compensation 

b) Rebates and refunds

c) Insurance, warranties, and service contracts provided to the business

d) Taxes

Compare and contrast when taxpayers are allowed to deduct the cost of warranties provided by others to the taxpayer (i.e., purchased by the taxpayer) and when taxpayers are allowed to deduct the costs associated with warranties they provide (sell) to others.

Compare and contrast the tests for accruing income and those for accruing deductions for tax purposes.

Compare and contrast financial accounting rules with the tax rules under UNICAP (§263A). Explain whether the UNICAP rules tend to accelerate or defer income relative to the financial accounting rules.

Describe why Congress enacted the UNICAP rules, and describe an exception to these rules.

Jack operates a large home repair business as a sole proprietorship. Besides providing services, Jack also sells home repair supplies to homeowners. However, these sales constitute a relatively small portion of Jack’s income. Describe the conditions under which Jack would need to account for sales and purchases of plumbing supplies using the accrual method. (Hint: Read §471(c) and Reg. §1.471-1.) 

Compare and contrast the tax treatment for rental income received in advance with advance payments for goods and services.

Describe the all-events test for recognizing taxable income.

] Fred is considering using the accrual method for his next business venture. Explain to Fred the conditions for recognizing income for tax purposes under the accrual method. 

The cash method of accounting is generally preferred by taxpayers. Describe two types of businesses that are not allowed to use the cash method.

How do the requirements for accruing expenses under financial accounting rules differ from the requirements for accruing deductions under tax accounting rules?

Explain why Congress sometimes mandates that businesses use specific accounting methods while other times Congress is content to require businesses to use the same accounting methods for tax purposes that they use for financial accounting purposes.

Describe the 12-month rule for determining whether and to what extent businesses should capitalize or immediately deduct prepaid expenses such as insurance or security contracts. Explain the apparent rationale for this rule.

Explain when an expenditure should be “capitalized” based upon accounting principles. From time to time, it is suggested that all business expenditures should be deducted when incurred for tax purposes. Do you agree with this proposition, and if so, why? 

How does an entity choose its tax year? Is it the same process no matter the type of tax year-end the taxpayer adopts? 

Why does the law generally require partnerships to adopt a tax year consistent with the year used by the partners?

Compare and contrast the different year-ends available to sole proprietorships, flow-through entities, and C corporations.

Explain why a taxpayer might choose one tax year-end over another if given a choice. 

What is the difference between a full year and a short year? Describe circumstances in which a business may have a short year.

How does a casualty loss on a business asset differ when the asset is stolen as opposed to destroyed in a fire? 

Explain the difference between calculating a loss deduction for a business asset that was partially damaged in an accident and calculating a loss deduction for a business asset that was stolen or completely destroyed in an accident.

Describe the gross receipts test and identify how this test relates to the business interest deduction.

Describe the computation of the limit placed on the business interest deduction. Is the disallowed business interest ever deductible?