412 Study Guide
CHAPTER 16
ACCOUNTING PERIODS AND METHODS
LECTURE NOTES
GENERAL OVERVIEW
1. Role of the Accountant. Accountants have particular expertise in advising clients in this area due to a broad understanding of the use of financial accounting methods (e.g., LIFO inventory and depreciation systems).
2. GAAP vs. Tax Accounting. The Commissioner of the IRS has very broad powers over accounting methods, and the Commissioner is not bound by generally accepted accounting principles. See Thor Power Tool Co. v. Comm., 79-1 USTC ¶ 9139, 43 AFTR2d 79-362, 99 S.Ct. 773 (USSC, 1979).
3. The argument that the taxpayer’s accounting method should be accepted because it is in accordance with GAAP can only be persuasive when the IRS has not issued a Regulation on the matter and the taxpayer’s method does not violate any statutory provision (e.g., the economic performance requirement).
ACCOUNTING PERIODS
4. Tax Fiscal Year. A business will often use a tax fiscal year that coincides with its natural business year. This enables the business to better match revenues and expenses. For example, a retailer with a fiscal year ending January 31st can process after-Christmas returns and can hold clearance sales before measuring income for the year.
a. Partnerships. Partnership tax years are generally determined by the tax year of its partners.
(1) Majority interest partners. The partnership tax year generally must be the same as the tax year of the majority interest partners. The majority interest partners are the partners who own a greater than 50 percent interest in the partnership capital and profits. (2) Principal partners. If the majority interest partners do not have the same tax year, the partnership must adopt the same tax year as its principal partners. A principal partner is a partner with a 5 percent or more interest in the partnership capital or profits.
(3) Least aggregate deferral method.
ACCOUNTING PERIODS AND METHODS
LECTURE NOTES
GENERAL OVERVIEW
1. Role of the Accountant. Accountants have particular expertise in advising clients in this area due to a broad understanding of the use of financial accounting methods (e.g., LIFO inventory and depreciation systems).
2. GAAP vs. Tax Accounting. The Commissioner of the IRS has very broad powers over accounting methods, and the Commissioner is not bound by generally accepted accounting principles. See Thor Power Tool Co. v. Comm., 79-1 USTC ¶ 9139, 43 AFTR2d 79-362, 99 S.Ct. 773 (USSC, 1979).
3. The argument that the taxpayer’s accounting method should be accepted because it is in accordance with GAAP can only be persuasive when the IRS has not issued a Regulation on the matter and the taxpayer’s method does not violate any statutory provision (e.g., the economic performance requirement).
ACCOUNTING PERIODS
4. Tax Fiscal Year. A business will often use a tax fiscal year that coincides with its natural business year. This enables the business to better match revenues and expenses. For example, a retailer with a fiscal year ending January 31st can process after-Christmas returns and can hold clearance sales before measuring income for the year.
a. Partnerships. Partnership tax years are generally determined by the tax year of its partners.
(1) Majority interest partners. The partnership tax year generally must be the same as the tax year of the majority interest partners. The majority interest partners are the partners who own a greater than 50 percent interest in the partnership capital and profits. (2) Principal partners. If the majority interest partners do not have the same tax year, the partnership must adopt the same tax year as its principal partners. A principal partner is a partner with a 5 percent or more interest in the partnership capital or profits.
(3) Least aggregate deferral method.