Question

11. [LO 4] Q20 Why does the law generally require partnerships to adopt a tax year consistent with the year used by the partners?

12. [LO 5] Q22 Explain when an expenditure should be “capitalized” rather than expensed based upon accounting principles. From time to time, it is suggested that all business expenditures should be expensed for tax purposes. Do you agree with this proposition, and if so, why? Chapter 9 Business Income, Deductions, and Accounting Methods Page 2 of 2

13. [LO 5] Q25 Why is it not surprising that specific rules differ between tax accounting and financial accounting?

14. [LO 5] Q27 Describe the all-events test for determining income and describe how to determine the date on which the all-events test has been met.

15. [LO 5] Q32 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.

16. [LO 5] Q35 Describe what is meant by economic performance and when economic performance occurs for the following expenses: Worker’s compensation, Rebates and refunds Insurance, warranties, and service contracts provided to the business Taxes

17. [LO 5] Q40 Describe how a business adopts a permissible accounting method. Explain whether a taxpayer can adopt an impermissible accounting method.

Answer 1

11.The purpose is to minimize income tax deferral opportunities for the partners. For eg, partner's tax year ends on December 31, 2017 and her partnership's tax year-end is January 31, 2018, the partner is treated as though she earned the entire amount of her share of the partnership's income on January 31, 2018. Thus, even though 11/12ths of the partnership's income was actually earned in 2017(February through December of 2017), for purposes of paying taxes on the income, the partner gets to defer this income until 2018.

12. An expenditure should be "capitalized" when the benefits from the expenditure occur in two different periods. The cost is spread across the applicable periods. The tax law is different from accounting principles, but the tax rules are also based upon the same matching principle, expenditures should be recognized in the period that revenues are generated. The proposition to expense all business expenditures is usually defended on the grounds of simplification, encouraging capital investment, and lack of bias (at least over the long run) and criticized on the grounds of potential economic bias (at least in the short run) and revenue loss by the government.

13.Tax accounting rules often differ from the objectives motivating financial accounting rules. Tax accounting aims to maximize revenue for the government while financial accounting attempts to minimize overstatements that might mislead investors and creditors. Hence, for policy and administrative reasons, the tax laws identify several circumstances when businesses must use specific tax accounting methods to determine taxable income no matter what accounting method they use for financial reporting purposes.

14.The all events test requires a taxpayer to recognize income if the taxpayer has a fixed right to receive a payment and the amount of the payment can be determined with reasonable accuracy. The all events test is typically met on the earliest of the following three dates: (1) the date the business provides the service or transfers goods, (2) the date payment is due, or (3) the date payment is received.

15. Under GAAP, businesses generally include in inventory only those costs incurred within their production facility. In contrast, the UNICAP rules require businesses to allocate to inventory the costs they incur not only inside the production facility but also the costs they incur outside the facility to support production (or inventory acquisition) activities. Uniform capitalization requires that both direct and certain indirect costs be capitalized into inventories (full absorption costing). Hence, businesses generally capitalize more costs to inventory for tax purposes than they capitalize under financial accounting rules.

16.Worker’s compensation, rebates, refunds, and service contracts are payment liabilities and economic performance occurs upon payment regardless of actual performance. Taxes are also payment liabilities, but under Section 461 accrual-method taxpayers that pay certain real estate taxes are allowed to elect to deduct tax payments ratably over the tax accrual period.

17.A business adopts a permissible accounting method by using and reporting the results of the method for at least one year. A business adopts an impermissible method by using and reporting the results of the method for two consecutive years.