Software Club 210: Light Red/Club_Software_210_Light_Red_Micro_Star_1997.iso/sba/f204.sbe

Text File | 1997-01-01 | 7KB | 148 lines

@074 CHAP ZZ

         ┌─────────────────────────────────────────────┐
         │            TAX ACCOUNTING METHODS           │
         └─────────────────────────────────────────────┘

The primary accounting methods businesses are allowed to
use for income tax purposes are the cash receipts and
disbursements method ("CASH BASIS") and the accrual method
("ACCRUAL BASIS").  However, certain taxpayers may be
allowed to use some hybrid combination of the two, such
as reporting inventory-related sales and purchases on
an accrual basis while reporting service income and
miscellaneous other expenses on the cash basis.  There
are also special methods of accounting, such as the
percentage-of-completion or completed contract accounting
for certain long-term contractors, such as companies
engaged in heavy construction on long-term contracts.
However, the Revenue Reconciliation Act of 1989 completely
eliminated the benefits of completed contract accounting
for most firms whose average annual gross receipts for the
3 preceding years exceed $10 million, except for certain
qualified ship contracts and certain home or residential
construction contracts.  Such firms are generally required
to use the less desirable percentage-of-completion method
for their long-term contracts.

@IF154xx]PLANNING NOTE REGARDING @NAME:
@IF154xx]-----------------------------------------------------------
@IF154xx]Because your firm is engaged in the construction or the
@IF154xx]contracting business, you may want to consider the possible
@IF154xx]use of the completed contract method of accounting, if you
@IF154xx]perform long-term contracts, as defined.
@IF154xx]
@IF165xx]PLANNING NOTE REGARDING @NAME:
@IF165xx]-----------------------------------------------------------
@IF165xx]Because your firm is engaged in the real estate development
@IF165xx]business, you may want to consider the possibility of using
@IF165xx]the completed contract method of accounting, if engaged in
@IF165xx]performing long-term contracts, as defined.
@IF165xx]
@IF101xx]Note that since your business has average annual gross
@IF101xx]receipts of more than $10 million, you are unlikely to qualify
@IF101xx]for use of this favorable accounting method, unless you come
@IF101xx]within one of the limited exceptions, such as for residential
@IF101xx]construction contracts, as described above.
@IF104xx]Small businesses, such as your firm (with $10 million or
@IF104xx]less in average annual gross receipts) are exempt from these
@IF104xx]new restrictions on use of the completed contract method --
@IF104xx]but ONLY with respect to construction contracts which are
@IF104xx]estimated to be completed within two years of the contract
@IF104xx]commencement date.
@IF154xx]-----------------------------------------------------------
@IF165xx]-----------------------------------------------------------

INVENTORY ACCOUNTING METHODS.  In addition to overall
tax accounting methods, there are various tax accounting
methods that are permissible for tax purposes.  While most
businesses with inventories use the simpler FIFO
(first-in-first-out) method of accounting for the value
of such inventories, a company may instead elect the
complex "LIFO" (last-in-first-out) method.  In times of
inflation, LIFO is attractive since it assumes that items
remaining in inventory at year-end are the oldest such
items, generally those you bought or manufactured a long
time ago, which have a lower cost.  By reducing the value
of your ending inventory, LIFO reduces your current taxable
income, and thus gives you significant tax deferral,
particularly in times of high inflation.

@IF143xx]The possible use of LIFO inventory accounting by your firm
@IF143xx]is a tax-deferral strategy that may be worth considering,
@IF143xx]since @NAME has inventories.
@IF143xx]
@IF144xx](NOTE: The use of LIFO accounting is not relevant to your
@IF144xx]business, since it is only applicable to companies that
@IF144xx]maintain inventories, unlike @NAME.)
@IF144xx]
While using the LIFO method is quite complex and may require
a lot of expensive accounting talent, a simplified version
of LIFO may be used by companies with under $5 million a
year in sales, as permitted by the Tax Reform Act of 1986.

@IF102xx]The simplified LIFO method would not be an available option
@IF102xx]for your company, since average annual gross receipts for
@IF102xx]@NAME are $5 million or more.
@IF102xx]
@IF103xx]The simplified LIFO method would could be a possible option
@IF103xx]for your company, since average annual gross receipts for
@IF103xx]@NAME do not exceed $5 million.
@IF103xx]
@IF144xx](If @NAME had inventory--it doesn't now.)
@IF144xx]
UNIFORM CAPITALIZATION RULES.  However, the '86 Act also
adopted tough new uniform capitalization rules that require
all manner of indirect expenses to be capitalized and
included in the cost of inventory (for both FIFO and LIFO
taxpayers).

@IF101xx]These rules apply not only to businesses that create
@IF101xx]inventories, but also to wholesalers and retailers who
@IF101xx]purchase goods for inventory, where such firms have over
@IF101xx]$10 million a year in average annual sales (during the past
@IF101xx]3 years).
@IF101xx]
@IF104XX]Fortunately, small retailers and wholesalers (those with
@IF104XX]$10 million or less of average annual sales) are exempted
@IF104XX]from this new requirement with regard to inventories.
@IF104xx]
@IF105xx]Thus, although your firm is in @BUSTYPE, these
@IF105xx]uniform capitalization rules do not apply to it, since annual
@IF105xx]sales of @NAME are $10M or less.
@IF105xx]
Note that the uniform capitalization rules also apply to
expenses incurred in construction and development activities.

With regard to inventory, these rules require businesses to
capitalize not only direct costs of acquiring or producing
inventory, but also a number of kinds of indirect costs that
were previously allowed as deductions, before the Tax Reform
Act of 1986.  This law (as it was amended by the Revenue
Act of 1987) requires some interest expense to be allocated
to inventory, and generally requires taxes, contributions
to pension and profit sharing plans (including past service
costs) and storage costs incurred by manufacturers following
completion of the manufacturing of a product to be allocated
as indirect costs.  Wholesalers and retailers (other than
small firms exempt from the uniform capitalization rules)
are required to allocate costs incident to purchasing
inventory (such as wages of employees who do purchasing),
repackaging, assembly and other costs incurred in processing
goods while in the taxpayer's possession; costs of storing
goods (rent, insurance premiums, taxes attributable to
a warehouse, etc.); and the portion of their general and
administrative costs allocable to these functions.  In
short, these Uniform Capitalization rules are an accounting
nightmare for those subject to them, as well as a way of
raising your tax burden by deferring the time at which you
can take a deduction for expenses incurred in your business.
Welcome to the world of "tax simplification."

@CODE: LS
Then, in @STATE, there is the "consistent fraud"
method of inventory accounting, which is widely used.

@CODE:OF