Flashcards
Chapter 9 Key Terms
Cards in this deck (25)
- 112-month ruleRegulation 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.
- 2Accounting methodThe 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.
- 3Accounting periodA fixed period in which a business reports income and deductions.
- 4All-events testrequires 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.
- 5Allowance methodMethod 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.
- 6Arm's length amountPrice in transactions among unrelated taxpayers, where each transacting party negotiates for his or her own benefit.
- 7Direct write-off methodRequired method for deducting bad debts for tax purposes. Under this method, businesses deduct bad debt only when the debt becomes wholly or partially worthless.
- 8Economic performance testThe 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.
- 9First-in, first-out (FIFO) methodan 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).
- 10Fiscal yearA year that ends on the last day of a month other than December.
- 11Flow-through entitieslegal 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.
- 12Impermissible accounting methodAn accounting method prohibited by tax laws.
- 13Last-in, First-out (LIFO) methodAn 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 purchases, first sold).
- 14Mixed-motive expendituresActivities that involve a mixture of business and personal objectives.
- 15Ordinary and necessaryAn expense that is normal or appropriate and that is helpful or conductive to the business activity.
- 16Payment liabilitiesLiabilities of accrual method businesses for which economic performance occurs when the business actually pays the liability for, among others: workers' compensation; tort; breach of contract of violation of law; rebates; awards, prizes, and jackpots; insurance, warranties, and service contracts provided to the business; and taxes.
- 17Permissible accounting methodAccounting method allowed under the tax law. Permissible accounting methods are adopted the first time a taxpayer uses the method on a tax return.
- 18Personal expensesexpenses incurred for the personal motives. Personal expenses are not deductible for tax purposes.
- 19Reasonable in amountAn expenditure is reasonable when the amount paid is neither extravagant nor exorbitant.
- 20Recurring itemAn 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.
- 21481 adjustmenta change to taxable income associated with a change in accounting methods.
- 22Specific identification methodan elective method for determining the cost of an asset of an asset sold. Under this method, the taxpayer specifically chooses the assets that are to be sold.
- 23Tax yearA fixed period in which a business reports income and deductions, generally 12 months.
- 24Travel expensesexpenditures incurred while "away from home overnight," including the cost of transportation, meals, lodging, and incidental expenses.
- 25Uniform cost capitalization (UNICAP) rulesspecify that inventories must be accounted for using full absorption rules to allocate the indirect costs of productive activities to inventory.
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- Business Income, Deductions, and Accounting Methods
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- Megan Heflin
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