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Expenses/Deductions ~ Benefiting Following Year
Preface ~ Client Letter - What this idea is about ~ Introduction ~
Dear Client:
Some business transactions and purchases will provide the business a use of the product or the services after the end of the tax year. For example, supplies might be purchased that last for a few weeks or a few months after the close of the year. An insurance policy may expire one-half through the subsequent year. There are many examples that can be named, but these should suffice to describe the subject of this topic.
The taxpayer may discover the accounting system used may define whether the expense of the product or services used in the following year will be deductible currently or must be deducted ratably over the two years.
A recent Tax Court case carries a warning for all accrual-basis taxpayers: Even expenditures that benefit a period of less than one year may have to be partially capitalized. In USFreightways Corporation v. Commissioner, the Tax Court held that an accrual basis taxpayer may not currently deduct an expense that partially benefits the following year even if that benefit expires within one year from when the expense is incurred.
.
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You have not engaged Bob Parrish CPA PC, Bob Parrish CPA, pro1040, Consulting on line, any related parties, or the ISP to perform any services for you or offer you advice. This entire site is for educational or informational purposes only. You are not to use the forms, concepts, strategies, or knowledge without assistance from a professional. The author, the corporation, the ISP, Bob Parrish CPA, Bob Parrish CPA, P.C. or other parties related to those or this site do not guarantee or warrantee in any manner the suitability, usefulness, accuracy, timeliness, or results of any portions of this site, nor the links contained in this site which link to other areas. At times, information is taken from other sources and is believed to be accurate, but no verification or confirmation is performed. Furthermore, if any federal or state law invalidates a portion of this disclaimer, the other portions still apply. In addition, any allegations or actions are restricted to arbitration only and must be arbitrated by the Better Business Bureau in Sarasota Florida. Reading of these pages constitutes complete acceptance and agreement with all disclaimer provisions on all pages of this site. ....... Sunday, March 04, 2007 08:44 AM
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Summary
| This company CEO Saw the company had too much dough He deducted both year expenses And Discovered He used the wrong method |
Related Information
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A few closely related topics & pages From Bob Parrish CPA PC (left-click this to expand it):
Plain English Explanation
Object Restated
Why or How It Works
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Cost V. Benefit
Other
Reserved
Your Answers
This Topic OBJECTIVE is: What it does Explanation of this topic and how it may affect you (for how it may affect you also refer to : Financial Accounting: Bookkeeping & Financials ~ Compliance - What is required for protection, defense, etc. ~ Alerts & Dangers)
TAXPAYER AND IRS POSITIONS
For those taxpayers on the Cash basis of accounting for tax purposes (normally for financial reporting purposes) it appears there remains a reasonable basis for deducting the amount in the year paid. This should hold true even in the instance the taxpayer borrows the money by the use of a credit card, or has made a loan for working capital purposes and paid the amounts from the loan proceeds.
Code Section 162(a) provides a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. The regulations interpreting that section further specify that vehicle operating costs and insurance premiums are among the items that may qualify as ordinary business expenses.
On the other hand, Code Section 263(a) denies a deduction for any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. As an example, the regulations refer to the "cost of acquisition, construction, or erection of buildings, machinery and equipment, furniture and fixtures, and similar property having a useful life substantially beyond the taxable year."
USFreightways argued that the "substantially beyond" terminology in the regulations should be interpreted to mean "more than 1 year beyond the taxable year." Thus, a current deduction should be allowed where the benefit of an expenditure extends less than twelve months into the subsequent tax period. USFreightways reasoned that because the benefit of the subject licenses and insurance extends less than one year into the following tax period, the costs do not relate to property having a useful life substantially beyond the taxable year. Hence, the costs do not have to be capitalized under Code Section 263 and may be currently deducted as a business expense under Code Section 162. USFreightways also asserted that, although the costs were expensed ratably over two years for book purposes and deducted currently in one year for tax purposes, the method of tax accounting used clearly reflects the company's income within the meaning of Code Section 446.
Conversely, the IRS argued that, since a greater percentage of the costs at issue were allocable to 1994 than to 1993, the expenditures for licenses and insurance do result in benefits to USFreightways extending ssubstantially beyond the taxable year. Therefore, the costs must be capitalized and amortized. In addition, the IRS argued that the distortion in taxable income caused by USFreightways's method of tax accounting was sufficiently material to require a change in method so that income would be clearly reflected.
Start of Plain English Section
Why or How it works - Both Sides of the Equation and Examples:
The government has an opinion that taxpayers should not be allowed to change the taxable income by paying for future costs and claiming a tax deduction in the current year. My personal opinion is that although the IRS opinion is well substantiated in some instances, it is nearly void of merit in other instances. therefore, I shall attempt to make some examples to support the arguments for the capitalizing of the costs, pointing out distortions of income and then reverse the role and show examples where there is no distortion, although the "rule" of capitalization has not been followed.
The Government Opinion:
The Government asserts it should not be good public policy to allow a taxpayer an alternative of paying for multiple years of an expense and claim a tax deduction in a current year. In the circumstance the taxpayer were to have a large amount of income in the year of expense and expect a very small amount of income in a subsequent year - the deduction in the high tax bracket year would serve to possibly decrease the tax bracket for that year and certainly provide more of a tax benefit in the year with the higher tax bracket.
The Government and its legal counsel will always have hindsight.
To support the Government side, there are certainly to be found somewhere in the United States taxpayers whom will receive a larger tax benefit by paying for or by incurring a liability for items lasating substntially beyond the current year. For example:
|
Government Position |
| Current Year Expected Tax Bracket |
Start of Plain English Section
Comparisons
For the Accrual Basis Taxpayer:
One alternative is to incur a liability (accrual basis) only for those items that will be consumed during the (prior to the end of) the current year.
For the Cash Basis Taxpayer
Be certain to complete the expenditure before the end of the year. Be certain the items paid for do not extend past the end of the next calendar year. Be certain to be consistent - in the type of items you choose for this, the amount you pay and substantially when this is done.
Contrasts
Start of Plain English Section
Cost v. Benefit Analysis ~ Its Value
Start of Plain English Section
Other
Start of Plain English Section
Reserved
Start of Plain English Section
Technical Analysis and Explanation
Commentary
Law
Regs
Cases
Revenue Procedures
Revenue Rulings
Private Letter Rulings
Commentary
The Following commentary is from PPC:
Tests for When a Cash Basis Taxpayer Can Deduct a Prepayment
In addressing the prepayment of livestock feed (prior to the enactment of IRC Sec. 464, which controls deductions for prepaid feed paid by certain cash-basis taxpayers), the IRS adopted a three-part test for when a cash-basis taxpayer can deduct the prepayment (Rev. Rul. 79-229). Under this test, a prepayment is deductible if (1) it is a true payment and not merely a refundable deposit; (2) it has a business purpose other than tax avoidance (e.g., to obtain better price or terms, a steady supply, or preferential treatment); and (3) there is no material distortion of income. Rev. Rul. 79-229 also offers a variety of factors to consider in determining whether the deduction results in a material distortion of income (e.g., the purpose for paying in advance and the customary business practices of the taxpayer).
The courts have struggled with the prepayment issue. Some have adopted a three-part test that basically tracks the one found in Rev. Rul. 79-229. Others have allowed prepayments not extending beyond the close of the following tax year. For example, the old Board of Tax Appeals allowed a current deduction for prepaid fire insurance that extended six months into the next year [Kauai Terminal, Ltd., 36 BTA 893 (1937), acq. 1938-2 CB 18].
More recently, the 9th Circuit allowed a cash-basis taxpayer to claim a current deduction for expenses that create assets having a useful life beyond the tax year of 12 months or less, if there is no tax avoidance motive or distortion of income [Martin Zaninovich, 616 F.2d 429, 80-1 USTC 9342, 45 AFTR 2d 80-1442 (9th Cir. 1980)]. In this case, a calendar year cash-basis taxpayer was required each December 20 to pay the annual ground rent under a 10-year lease. The IRS tried to force the taxpayer to prorate the annual payment over 12 months with the bulk of the deduction falling into the next calendar year. The 9th Circuit concluded that the difference resulting from the IRS’s proration and the taxpayer’s method was "inconsequential," since the deduction for only the first and last lease year would differ. The court observed that allowing taxpayers to deduct payments not extending beyond the following year eliminates "pointless complexity" in the timing of deductions.
Observation: A cash basis taxpayer who prepays solely to obtain a tax benefit apparently is not entitled to a current deduction. However, a taxpayer residing within the jurisdiction of the 9th Circuit who prepays a noncapital expense for a valid business reason, such as for better terms or a lower price, may be entitled to a current deduction if the benefit of the payment does not last substantially beyond the end of the tax year and there is no material distortion of income. For this purpose, the Zaninovich one-year rule would provide that payments covering a period of no more than 12 months past the close of the current year are not "substantially beyond" the close of the current year.
Now assume the same facts as in the previous example except that Tim’s payment covers only a 12-month period beginning December 1, 2000. If Tim lives within the jurisdiction of the 9th Circuit (or takes a position based on the cases and rulings discussed in the preceding paragraphs), he may be able to deduct the entire $6,000 prepayment in 2000. However, given the uncertainty of the law, his practitioner should exercise caution in recommending this strategy to him, particularly if the prepayment period extends beyond the end of the next tax year.
UNITED STATES TAX COURT
USFREIGHTWAYS CORPORATION, f.k.a. TNT FREIGHTWAYS CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE,
Respondent
Docket No. 459-98. Filed November 2, 1999.
P, an accrual method taxpayer, made expenditures during the 1993 taxable year for licenses and insurance which had an effective period extending into 1994. For purposes of book accounting and financial reporting, P ratably allocated these costs over the periods to which they related. For tax accounting purposes, however, P currently deducted all license and insurance expenses in the year of payment. Held: On the facts, P, as a taxpayer utilizing the accrual method, is not entitled to currently deduct costs benefiting future tax periods in the year of payment. R's determination of a deficiency is sustained.
Rex A. Guest and Melvin L. Katten, for petitioner.
Joseph P. Grant and Robin L. Herrell, for respondent.
OPINION
NIMS, Judge: Respondent determined a Federal income tax deficiency for petitioner's 1993 taxable year in the amount of $1,712,070. After concessions, the issue for decision is whether petitioner, an accrual method taxpayer, may deduct costs expended for licenses, permits, fees, and insurance in the year paid rather than amortizing such costs over the taxable years to which they relate.
Unless otherwise indicated, all section references are to sections of the Internal Revenue Code in effect for the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
This case was submitted fully stipulated, and the facts are so found. The stipulations filed by the parties, with accompanying exhibits, are incorporated herein by this reference.
BACKGROUND
USFreightways Corporation is, and was at the time of filing the petition in this case, a Delaware corporation with a principal place of business in Rosemont, Illinois. USFreightways and its subsidiaries (hereinafter collectively petitioner) are engaged in the business of transporting freight for hire by trucks throughout the continental United States.
Incident to its trucking business, petitioner is required by State and local government authorities to make expenditures for various licenses, permits, and fees (hereinafter collectively licenses) before its trucks may be legally operated in the issuing jurisdictions. The licenses are then effective for specified periods of time. In 1993, petitioner paid $4,308,460 for such licenses. None of these licenses had an effective period in excess of 1 year, but the expiration date for some fell within the 1994, rather than the 1993, taxable year.
Similarly, petitioner also purchased liability and property insurance coverage which extended into future tax years. In 1993, petitioner paid premiums of $1,090,602 for policies covering the 1-year period from July 1, 1993, to June 30, 1994.
For purposes of Federal income taxes, book accounting, and financial reporting, petitioner generally employs the accrual method and a 52/53 week fiscal year. Petitioner's 1993 fiscal year ended on January 1, 1994. <<ENDNOTE 1>>
In compiling its financial books and records for 1993, petitioner expensed the amounts paid in 1993 for licenses and insurance ratably over the 1993 and 1994 years. The license costs were allocated $1,869,564 to 1993 and $2,438,896 to 1994. The insurance premiums were likewise allocated $545,301 to 1993 and $545,301 to 1994. Amounts not expensed in 1993 were reflected as prepayments on petitioner's balance sheet.
In preparing its income tax returns, however, petitioner deducted the full amount expended for licenses and insurance in the year of payment. Thus, in 1993, deductions of $4,308,460 and $1,090,602 were taken for licenses and insurance, respectively.
DISCUSSION
We must decide whether petitioner, as an accrual basis taxpayer, may deduct expenditures for licenses, permits, fees, and insurance in the year paid or whether deductions for such costs must be spread ratably over the taxable years to which they pertain.
Petitioner contends that, because the benefit of the subject licenses and insurance extends less than 1 year into the following tax period, the costs do not relate to property having a useful life substantially beyond the taxable year. Hence, petitioner argues that the costs do not require capitalization under section 263 and may be currently deducted as a business expense under section 162. Further, petitioner asserts that, although the costs are expensed ratably over 2 years for purposes of financial records and deducted currently, in 1 year, for tax purposes, the method of tax accounting used clearly reflects petitioner's income within the meaning of section 446. Thus, any attempt by respondent to require a change in this tax accounting method constitutes, in petitioner's view, an abuse of discretion. Conversely, respondent contends that, since a greater percentage of the costs at issue is allocable to 1994 than to 1993, the expenditures for licenses and insurance do result in benefits to petitioner extending substantially beyond the taxable year. Therefore, respondent asserts that the costs must be capitalized and amortized. In addition, respondent argues that the distortion in taxable income caused by petitioner's method of tax accounting is sufficiently material to require a change in methods in order to clearly reflect income.
We agree with respondent that petitioner, as an accrual method taxpayer, is entitled to deduct expenses which are more than incidental and allocable to future tax years only in the taxable periods to which they relate.
General Rules
As a threshold premise, section 446(a) states the general rule:
"Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books." The corollary to this rule, with respect to the timing of deductions, is set forth in section 461(a) and reads: "The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income." Hence, petitioner here, as an accrual basis taxpayer deducting expenses under the cash or payment method, is indisputably in contravention of these general rules. However, income tax regulations implicitly and courts explicitly recognize that the section 446(a) requirement of conformity between financial and tax accounting is not absolute. Section 1.446-1(a)(4), Income Tax Regs., implies that deviation may be permitted by mentioning the need for records to reconcile differences between books and tax returns. Courts expressly sanction variations between financial and tax reporting but will do so only if two criteria are satisfied: (1) Other Code requirements, such as the deduction and capitalization rules of sections 162 and 263, must be met, and (2) the method of accounting must clearly reflect taxable income.
See, e.g., Hotel Kingkade v. Commissioner, 180 F.2d 310, 312-313 (10th Cir. 1950), affg. 12 T.C. 561 (1949); Coors v. Commissioner, 60 T.C. 368, 392-398 (1973), affd. 519 F.2d 1280 (10th Cir. 1975); Fidelity Associates, Inc. v. Commissioner, T.C. Memo. 1992-142.
Deduction and Capitalization Rules
On one hand, section
162(a) provides in relevant part: "There shall be allowed as a
deduction all the ordinary and necessary expenses paid or incurred during
the taxable year in carrying on any trade or business".
Income tax
regulations interpreting the section further specify that vehicle
operating costs and insurance premiums are among the items that may
qualify as ordinary business expenses. Sec. 1.162-1(a), Income Tax Regs.
On the other
hand, section 263(a), entitled Capital Expenditures, mandates: "No
deduction shall be allowed for -- (1) Any amount paid out for new
buildings or for permanent improvements or betterments made to increase
the value of any property or estate." Regulations then offer the
following explanatory
examples: "The cost of acquisition, construction, or erection of
buildings, machinery and equipment, furniture and fixtures, and similar
property having a useful life substantially beyond the taxable year."
Sec. 1.263(a)-2(a), Income Tax Regs.
The
significance of classifying any given expense as either ordinary or
capital lies in the contrasting tax treatments mandated by the label
affixed. As expounded in a recent Supreme Court analysis of the two
sections, "The primary effect of characterizing a payment as either a
business expense or a capital
expenditure concerns the timing of the taxpayer's cost recovery: While
business expenses are currently deductible, a capital expenditure usually
is amortized and depreciated over the life of the relevant asset".
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 83-84 (1992). The purpose of
the sections is "to match expenses with the revenues of the taxable
period to which they are properly attributable, thereby resulting in a
more accurate calculation of net income for tax purposes." Id. at 84.
Furthermore, because deductions are matters of "legislative
grace", "the burden of clearly showing the right to the claimed
deduction is on the taxpayer." Id. (quoting Interstate Transit Lines
v. Commissioner, 319 U.S. 590, 593 (1943)).
In distinguishing
between capital and ordinary costs, the predominant factor for
consideration is whether the payment creates a future benefit that is more
than incidental:
Although the
mere presence of an incidental future benefit-"some future
aspect" -- may not warrant capitalization, a taxpayer's realization
of benefits beyond the year in which the expenditure is incurred is
undeniably important in determining whether the appropriate tax treatment
is immediate deduction or capitalization. [Id. at 87.]
The creation or
enhancement of a separate and distinct asset is unnecessary. See id. An
additional factor weighing in favor of capital treatment arises where
"the purpose for which the expenditure is made has to do with the
corporation's operations and betterment, sometimes with a continuing
capital asset, for the duration of its existence or for the indefinite
future or for a time somewhat longer than the current taxable year."
Id. at 90 (quoting General Bancshares Corp. v. Commissioner, 326 F.2d 712,
715 (8th Cir. 1964)).
Thus, income
tax regulations and the Supreme Court both point to duration of the
resultant benefit beyond the current taxable year as a critical feature
for distinguishing between capital and ordinary.
Petitioner
focuses on the "substantially beyond" terminology in the
regulations and argues that this test for capitalization should be
interpreted to mean "more than 1 year beyond the taxable year".
Current deduction should therefore be allowed where the benefit of an
expenditure extends less than 12 months into the subsequent tax period.
This position, however, has at least two significant shortcomings.
First, the
cases cited by petitioner fail to support any widespread existence of the
rule for which petitioner contends. As correctly noted by respondent, a
significant number of the cases cited simply hold that expenditures
creating a benefit with a duration in excess of 1 year must
be capitalized. See,
e.g., Jack's Cookie Co. v. United States, 597 F.2d 395 (4th Cir. 1979);
Bilar Tool & Die Corp. v. Commissioner, 530 F.2d 708 (6th Cir. 1976),
revg. 62 T.C. 213 (1974); Clark Oil & Refining Corp. v. United States,
473 F.2d 1217 (7th Cir. 1973); American Dispenser Co. v. Commissioner, 396
F.2d 137 (2d Cir. 1968), affg. T.C. Memo. 1967-153; Fall River Gas
Appliance Co. v. Commissioner, 349 F.2d 515 (1st Cir. 1965), affg. 42 T.C.
850 (1964); United States v. Akin, 248 F.2d 742 (10th Cir. 1957); Hotel
Kingkade v. Commissioner, 180 F.2d 310 (10th Cir. 1950). They do not
specifically address the proper treatment for assets with a useful
life of less than 1
year, but the benefits of which extend beyond the years in which the
related costs are incurred. See id. Moreover, language used in several of
these cited cases to explain the 1-year rule is contrary to petitioner's
position. For example, in Jack's Cookie Co. v. United States, supra at
402, the court stated that the 1-year rule "treats an item as either
a business expense, fully deductible in the year paid, or a capital
expenditure, which is not, depending upon whether it secures for the
taxpayer a business advantage which will be exhausted completely within
the tax year." Similarly, the court in American Dispenser Co. v.
Commissioner, supra at 138 (quoting Sears Oil Co. v. Commissioner, 359
F.2d 191, 197 (2d Cir. 1966)), specified: "The test for whether an
item should be treated as a current expense or as a capital expenditure is
whether the utility of the expenditure survives the accounting
period."
Hence, the
focus of the above quotations rests upon whether the life of the contested
benefit exceeds the tax year in which it is incurred, not whether it
endures beyond one 12-month period. In other cases, again as noted by
respondent, no indication is given as to the intended meaning of the
1-year terminology employed. See, e.g., Bilar Tool & Die Corp v.
Commissioner, supra; Clark Oil & Refining Corp. v. United States,
supra; Fall River Gas Appliance Co. v.
Commissioner, supra; United States v. Akin, supra; Hotel Kingkade
v. Commissioner, supra.
Thus,
widespread support for a rule
which would permit near-automatic deduction for costs related
to benefits lasting less than one 12-month period is lacking.
A second, more
fundamental problem with petitioner's argument is that even if such a
1-year rule were widely recognized, it would be inapplicable to an accrual
method taxpayer. Case law requires that a distinction be drawn between
accrual and cash basis taxpayers in situations analogous to that of
petitioner. For instance, even in Zaninovich v. Commissioner, 616 F.2d
429, 431-432 & nn. 5-6 (9th Cir. 1980), revg. 69 T.C. 605, upon which
petitioner relies as creating a rule "[allowing] a full deduction in
the year of payment where an expenditure creates an asset having a useful
life beyond the taxable year of twelve months or less," the Court of
Appeals for the Ninth Circuit expressly approved the opposite result
reached in Bloedel's Jewelry, Inc. v.
Commissioner, 2 B.T.A.
611 (1925), on the grounds that the case involved an accrual basis
taxpayer. The issue in Bloedel's Jewelry was the treatment of a payment
made in 1920 for a lease term running from September 1920 through August
1921, and the Court of Appeals in Zaninovich v. Commissioner, 616 F.2d at
431 n. 5, responded to the disallowance of a current deduction for this
lease as follows:
The accrual
method of accounting, unlike the cash basis method, aims to allocate to
the taxable year expenses attributable to income realized in that year.
For this reason, it was appropriate for the lessee in Bloedel's Jewelry,
supra, to prorate to the next year that portion of the rental payment
which could be matched with income realized in the next year.
A similar
distinction between accrual and cash basis taxpayers also arises in cases
dealing specifically with the deductibility of insurance expenses. Cash
basis taxpayers typically have been obligated to capitalize payments for
insurance with terms in excess of 1 year but, with respect to insurance
covering 1 year or less, have been permitted full deduction in the year of
payment. See, e.g., Commissioner v. Boylston Market Association, 131 F.2d
966 (1st Cir. 1942), affg. B.T.A. Memorandum Opinion dated Nov. 6, 1941;
Bell v. Commissioner, 13 T.C. 344 (1949); Peters v. Commissioner, 4 T.C.
1236 (1945); Jephson v. Commissioner, 37 B.T.A. 1117 (1938); Kauai
Terminal, Ltd. v. Commissioner, 36 B.T.A. 893 (1937).
In contrast,
where the taxpayer utilizes the accrual method, proration of premium
expenses has been required, and no distinction based upon policy length
has been articulated. See, e.g., Johnson v. Commissioner, 108 T.C. 448
(1997), affd. in part and revd. in part on other grounds 184 F.3d 786 (8th
Cir. 1999); Higginbotham-Bailey-Logan Co. v. Commissioner, 8 B.T.A. 566
(1927).
For instance,
in Johnson v. Commissioner, supra, a taxpayer employing the accrual method
purchased insurance policies covering periods of 1 to 7 years. Given this
scenario, the Court made no attempt to ascertain which of the policies,
such as those covering only 1 year, would expire within the following
taxable year. Instead, the Court ruled that "to the extent that part
of any Premium was allocable to coverage for subsequent years, it must be
capitalized and amortized by deductions in those years." Id. At 488.
Likewise, in Higginbotham-Bailey-Logan v. Commissioner, supra, the Court
disallowed a deduction for prepaid insurance taken by an accrual basis
taxpayer without inquiring into whether the policy might terminate within
the next year. The Court resolved the issue by stating:
"The
adjustment made by the Commissioner appears to be in accordance with the
method of accounting employed by the petitioner and appears further to be
such that petitioner's net income is more nearly correctly reflected than
on the basis used in the return." Id. at 577.
Hence,
beginning as early as 1927 and followed as recently as 1997, reported
cases have indicated that an accrual basis taxpayer must prorate insurance
expenses, and no taxpayer utilizing
such a method has been afforded the treatment that petitioner here
requests.
As a result,
consistency with case law negates the possibility of a 1-year rule with
respect to the accrual basis taxpayer. It follows that petitioner's
deductions were improper under the rules governing deductions and
capitalization.
Clear
Reflection of Income Rules
Section 446(b)
provides: "If no method of accounting has been regularly used by the
taxpayer, or if the method used does not clearly reflect income, the
computation of taxable income shall be made under such method as, in the
opinion of the Secretary, does clearly reflect income."
However,
petitioner acknowledges on brief that "The capitalization rules stand
on their own as does the clear reflection of income provision of I.R.C.
section 446(b)." Hence, because petitioner's treatment of license and
insurance costs violated sections 162 and 263, we need not reach the issue
of whether petitioner's method of tax accounting also failed to clearly
reflect income. The related evidentiary objection raised by petitioner,
contesting the admissibility of financial data for years subsequent to
1993, is likewise rendered moot. The challenged figures were offered only
on the question of clear reflection. Although petitioner asserts that
respondent abused his discretion in changing an accounting method
authorized by the Code and consistently applied, petitioner does not argue
that a method contrary to law is nonetheless acceptable so long as it has
been consistently applied.
We therefore
held that petitioner is not entitled to currently deduct license and
insurance expenses allocable to the following taxable year.
Respondent's
determination of a deficiency with respect to petitioner's 1993 taxable
year is sustained.
To reflect the foregoing, Decision will be entered under Rule 155.
Start of Revenue Procedures Section
Start of Private Letter Rulings
Tax Killers
Title 1
Title 2
Title 3
Title 4
Title 5
Title 6
Accrual Basis ~ If you keep your financial records and/or your tax records on the accrual basis, then be prepared to meet or expect a challenge if any tax deductions are for items that are not fully expended in the current tax year. The prudent position is to capitalize any expenditures that have a material amount not consumed before the end of the current. year.
Cash Basis ~ Apparently the IRS has successfully challenged those taxpayers using the accrual basis. However, this success on the part of the IRS does not change, at this time, the tax treatment for the cash basis taxpayer.
Cost Killers
Title 1
Title 2
Title 3
Title 4
Title 5
Title 6
Although the manager may desire to purchase in quantity or pay for service or other contracts in advance to take advantage of discounts, there is little or no benefit for the accrual basis company. The cash basis company can continue to expense the items as long as the items will be totally consumed before the end of the following tax year.
Prepare for Your CPA or Attorney (or prepare for doing this yourself)
Entrance Interview
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From Corporation or Organization Records (meetings, etc.)
About the Preparation Procedures
If you have decided this task must be done, the first procedure is to be certain you have all the facts important to this topic. So that you may know the value, to you personally, of this topic you must have facts of your circumstances. So that you may comply with applicable rules, you must have all the facts. Factual research is time consuming and if not performed wisely will be very expensive if not performed properly, and thoroughly. IF you decide to make this a do-it-yourself project you should seek the advice of a professional qualified in your jurisdiction to assist you with defining important information and then to overview the information you have gathered.
What to gather - an Organizer and Prepare for your CPA, Attorney or Financial Adviser
Organizer
From Your Other Business, or Financial Records
From Corporation Records or Organization Records (meetings, etc.)
Start of Preparing For You CPA Section
Do It Yourself - Forms Required to Be Filed, Checklists, Etc.
DO
IT YOURSELF
Action
Checklist - What To Do
PRINT ALL THE REQUIRED DOCUMENTS
OBTAIN THE STANDARD WORKPAPER FORMS NEEDED
Title 1
Title 2
Title 3
Title 4
Title 5
Title 6
How to do this - What to Do
GENERAL SETUP & STARTUP
PRINT FORMS AND DOCUMENTS NEEDED
PRESENTATION STANDARDS
STARTING - FIRST THINGS FIRST, OBTAIN WHAT YOU NEED
OBTAIN THE ORGANIZER AND BE CERTAIN ALL INFORMATION IS AVAILABLE
OBTAIN AND SORT THE INFORMATION
OBTAIN THE STANDARD WORKPAPER FOLDER SETUP
OBTAIN THE STANDARD PRESENTATION LAYOUT
OBTAIN & OPEN ALL STANDARD DOCUMENTS OR WORKPAPERS
OVERVIEW & BECOME FAMILIAR WITH THE ENTRANCE INTERVIEW FORM
OVERVIEW THE LIST OF INFORMATION AND CLIENT OR BUSINESS RECORDS NEEDED
START THE REQUIRED COMPUTER PROGRAMS
OBTAIN THE CHECKLISTS IF NEEDED AND WORK ON THE JOB BY EACH TYPE OF ACTIVITY OR EVENT
OBTAIN THE STANDARD WORKPAPER FORMS NEEDED
LIST OF THE STANDARD FORMS AND W/P NEEDED
OBTAIN THE DOCUMENTS FOR THIS JOB
PLACE BLANK FORMS IN THE CORRECT SEQUENCE
GENERAL & FOR ALL JOBS
Instructions for finalizing and completion - for example instructions for the mailing of forms to the IRS
Actions Checklist
Report Cover Letter
Required Documents and attachments
DOING THE WORK
PRINT ALL THE REQUIRED DOCUMENTS OR MAKE COPIES AS NEEDED
DETERMINE THE CORRECT PRESENTATION STANDARD TO USE
ENGAGEMENT LETTER AND DISCLAIMER
PRESENTATION IN GENERAL
WHAT THE ENGAGEMENT IS LIMITED TO
WHAT SERVICES WERE PERFORMED
HOW THIS HELPS & BENEFITS
4 WAY TEST APPLICATION
Is it the TRUTH
Is it FAIR
Will it build GOODWILL and BETTER FRIENDSHIPS
Will it be BENEFICIAL to all
OVERVIEW THE WORK
BEFORE FINALIZING THE WORK PROCESS CONSIDER THE FOLLOWING
Compliance
Paying Bills or other events
The professional should perform functions the client does not have time for
The professional should perform necessary functions the client staff does not have training for
Reduce Costs
Reduce Risks
Setting Goals or objectives
Setting methods for monitoring
Setting dates, methods & procedures for follow-up
Setting guidelines for defining when variances from the guideline warrant policy or procedure changes
Identify the policies or procedures that need to be changed to accomplish the goal or objective
FINAL OVERVIEW BEFORE THE JOBS IS ENDED & CLOSED
LOOK AT THE ORIGINAL QUESTION - has it been answered, were more questions added?
THE ANSWER - limit the answer to a short paragraph of about 7 sentences. Did this solve the issue? The ANSWER is not considered the SOLUTION
THE SOLUTION - understand the objective or goal and restate it. Were the goals met? What might prevent obtaining the goals. Do the benefits outweigh the costs? Reduce Costs? Reduce Risks? Setting Goals or objectives:
Setting methods for monitoring
Setting dates, methods & procedures for follow-up
Setting guidelines for defining when variances from the guideline warrant policy or procedure changes
Identify the policies or procedures that need to be changed to accomplish the goal or objective. State Remedial Solutions and Preventive Solutions.
ACTIONS - checklist, calendar, columnar presentation showing separate columns for Client, CPA, Broker, Bookkeeper, Lawyer, Insurance Agent, etc.
COST v. BENEFITS ANALYSIS
PROPOSAL
FACTS DISCOVERED & USED
COMPUTATIONS & REPORTS
TECHNICAL ANALYSIS WITH CITATIONS AND AUTHORITY
FORMS - agreements, contracts, trusts, tax forms, financial reports, management information reports, policies or procedures
REQUIRED ATTACHMENTS
Overview - look at the steps required and the steps performed. Are there unusual items? Are there exceptions or adverse results of the procedures performed? Find resolutions for all unusual or adverse items.
Compliance - has compliance "substantially" been met. That is no "material" adverse results?
Math Check
Proof and spell check
Theory & overview by someone not performing the procedures
Close the case and archive it.
Financial Accounting - Bookkeeping and Financial Statements
Financial Statement Presentation
Notes to Financial Statements
How to Make Entries
What Kind of Records to Keep
Bookkeeping Methods - Cash, Accrual and Other
How the Business Entity Affects the Recording
Financial Statement Presentation
Back to Start of Financial Accounting: Bookkeeping & Financials
Back to Start of Financial Accounting: Bookkeeping & Financials
Back to Start of Financial Accounting: Bookkeeping & Financials
Back to Start of Financial Accounting: Bookkeeping & Financials
Bookkeeping Methods - Cash, Accrual and Other
Back to Start of Financial Accounting: Bookkeeping & Financials
How the Business Entity Affects the Recording
Sole Proprietor
Corporation - C & S
Partnerships - General, Limited, Limited Liability Company, Registered Limited Liability Partnership or Company
Trusts
Tax Exempt
Back to Start of Financial Accounting: Bookkeeping & Financials
Compliance Requirements - Requirements, Defense, Protection, Etc.
Title 1
Title 2
Title 3
Title 4
Title 5
Title 6
Compliance Checklist
Back to Start of What is required for protection, defense, etc.
Alerts and Dangers
Action Checklist
Alerts & Dangers - Risks
Asset Protection
Your Defense
Title 5
Title 6
Back to Start of Alerts & Dangers
Back to Start of Alerts & Dangers
Back to Start of Alerts & Dangers
Back to Start of Alerts & Dangers
Tools - Spreadsheets - Documents - Checklists - Organizers
TOOLS
Spreadsheets &
Math
Spreadsheets & Computations
Back to Start of Spreadsheets & Math
Sample Agreements - Trusts - Etc.
Title 1
Title 2
Back to Start of Contracts, Trusts, etc.
Required Reports
Title 1
Title 2
Back to Start of Reports Required
Checklist for Deployment
Title 1
Title 2
Checklists for Deployment
Back to Start of Checklists - Deployment
Checklist for Monitoring
Title 1
Title 2
Back to Start of Checklist - Monitoring
Index
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Title 2
Click on the text -- (a) to expand or collapse the outline if the text has no underline OR (b) to jump to the topic if the text has an underline
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Analyses
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Plain English Analysis - Your Answers
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Do It Yourself
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How To Do This
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Increase Wealth
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Information Sources
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Introduction
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Procedures
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Tools
Contact Information
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