Tax Accounting

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After completing Chapter 13, you should be able to:
1. List what are permissible tax years.
2. Explain the requirements for changing a tax year.
3. Identify the available accounting methods.
4. Understand the rules for accounting method changes.
5. Account for the capitalization of inventory costs.
6. Describe long-term contract reporting.
7. Defi ne the installment method of accounting.
The fi rst 12 chapters are presented primarily from the individual taxpayer’s point of view (including self-employed taxpayers). This chapter provides a general discussion of the previous material as it applies to other entities and provides a
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Thus, the Internal Revenue
Service has been provided with Code Sec. 482, under which it may reallocate items of income, deduction, credit, or allowance in order to prevent tax avoidance when two or more organizations are controlled by the same interest. Further, if the taxpayer’s method of accounting does not clearly refl ect income, Code Sec. 446 authorizes the IRS to require the use of a method that will do so. Additionally, the Supreme Court has indicated that the use of generally accepted accounting principles (GAAP), which apply to fi nancial accounting and are considered to be the “best” accounting practices, does not necessarily clearly refl ect income and does not shift the burden of proof to the IRS to show otherwise. Thor Power Tool Co., 79-1 USTC ¶9139, 439 U.S. 522 (1979).
Once the questions of what items are includible in gross income and what items are deductible in computing taxable income are answered, a second set of questions must be faced. These relate to when such qualifying items are to be utilized in that computation. In other words, in what tax year is an item of income actually to be included in gross income? In what tax year is a deduction to be subtracted from gross income?
The general answers to most of these “when” questions are furnished in terms of the method of accounting regularly employed by the taxpayer in his or her business and recordkeeping. That record, however, must “clearly refl ect income.” Various accounting
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