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Flashcards by Ms. Cassie Weitzenkamp, CPA, MPA, updated more than 1 year ago
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| Question | Answer |
| 12-month rule | regulation that allows prepaid business expenses to be currently deducted when the contract does not extend beyond 12 months and the contract period does not extend beyond the end of the tax year following the year of the payment. |
| Accounting method | the procedure for determining the taxable year in which a business recognizes a particular item of income or deduction, thereby dictating the timing of when a taxpayer reports income and deductions. |
| Accounting period | a fixed period in which a business reports income and deductions. |
| All-events test | requires that income or expenses are recognized when (1) all events have occurred that determine or fix the right to receive the income or liability to make the payments and (2) the amount of the income or expense can be determined with reasonable accuracy. |
| Allowance method | method used for financial reporting purposes; under this method, bad debt expense is based on an estimate of the amount of the bad debts in accounts receivable at year-end. |
| Arm’s-length amount | price in transactions among unrelated taxpayers, where each transacting party negotiates for his or her own benefit. |
| Direct write-off method | required method for deducting bad debts for tax purposes. Under this method, businesses deduct bad debt only when the debt becomes wholly or partially worthless. |
| Economic performance test | the third requirement that must be met for an accrual method taxpayer to deduct an expense currently. The specific event that satisfies the economic performance test varies based on the type of expense. |
| First-in, first-out (FIFO) method | an accounting method that values the cost of assets sold under the assumption that the assets are sold in the same order in which they are purchased (i.e., first purchased, first sold). |
| Fiscal year | a year that ends on the last day of a month other than December. |
| Flow-through entities | legal entities, like partnerships, limited liability companies, and S corporations, that do not pay income tax. Income and losses from flow-through entities are allocated to their owners. |
| Gross receipts test | determines if a business qualifies as a “small” business under an annual gross receipts test if its average annual gross receipts for the three prior taxable years does not exceed an indexed threshold set at $26 million for 2020. For purposes of the test, includes total sales (net of returns and allowances but not cost of goods sold), amounts received for services, and income from investments (including tax-exempt interest). |
| Impermissible accounting method | an accounting method prohibited by tax laws. |
| Last-in, first-out (LIFO) method | an accounting method that values the cost of assets sold under the assumption that assets are sold in the reverse order in which they are purchased (i.e., last purchased, first sold). |
| Mixed-motive expenditures | activities that involve a mixture of business and personal objectives. |
| Ordinary and necessary | an expense that is normal or appropriate and that is helpful or conducive to the business activity. |
| Payment liabilities | liabilities of accrual method businesses for which economic performance occurs when the business actually pays the liability for, among others: worker's compensation; tort; breach of contract or violation of law; rebates and refunds; awards, prizes, and jackpots; insurance, warranties, and service contracts provided to the business; and taxes. |
| Permissible accounting method | accounting method allowed under the tax law. Permissible accounting methods are adopted the first time a taxpayer uses the method on a tax return. |
| Personal expenses | expenses incurred for personal motives. Personal expenses are not deductible for tax purposes. |
| Reasonable in amount | an expenditure is reasonable when the amount paid is neither extravagant nor exorbitant. |
| Recurring item | an election under economic performance to currently deduct an accrued liability if the liability is expected to persist in the future and is either not material or a current deduction better matches revenue. |
| §481 adjustment | a change to taxable income associated with a change in accounting methods. |
| Specific identification method | an elective method for determining the cost of an asset sold. Under this method, the taxpayer specifically chooses the assets that are to be sold. |
| Tax year | a fixed period in which a business reports income and deductions, generally 12 months. |
| Travel expenses | expenditures incurred while “away from home overnight,” including the cost of transportation, meals, lodging, and incidental expenses. |
| Uniform cost capitalization (UNICAP) rules | specify that inventories must be accounted for using full absorption rules to allocate the indirect costs of productive activities to inventory. |
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