EA2 Study Unit 1.4 Entity Types, Methods, and Periods - Accounting Periods - Questions PDF

1)[]{#anchor} []{#anchor-1}In order to adopt a fiscal tax year on its first federal income tax return, the taxpayer must[]{#anchor-2} Answer (D) is correct.\ Permission from the IRS is generally not needed to place a taxpayer's first tax year on either a calendar- or a fiscal-year basis. A taxpaye...

1)[]{#anchor} []{#anchor-1}In order to adopt a fiscal tax year on its first federal income tax return, the taxpayer must[]{#anchor-2} Answer (D) is correct.\ Permission from the IRS is generally not needed to place a taxpayer's first tax year on either a calendar- or a fiscal-year basis. A taxpayer's first tax year is selected on the initial return. However, in order to adopt a fiscal year, the new taxpayer must adopt that year on the books and records before the due date for filing the return for that year (not including extensions). ------------------------------ ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 2)[]{#anchor-3}[]{#anchor-4} []{#anchor-5}For the first 6 months of 2023, Mr. Heston, who files jointly with his wife, had adjusted gross income of \$34,500 and itemized deductions of \$15,800. Mr. Heston changed his accounting period and is required to file a short period return for this 6-month period. What is Mr. Heston's annualized income?[]{#anchor-6} ------------------------------ ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Answer (D) is correct.\ Section 443(a)(1) requires a taxpayer who changes accounting periods to file a short period return, in which income must be annualized \[Sec. 443(b)\]. Income is annualized by multiplying the short period modified taxable income (gross income minus deductions allowed) by 12, dividing the result by the number of months in the short period. Heston's annualized income is --------------------------------- ------------- Adjusted gross income \$ 34,500  Less: Itemized deductions (15,800) Taxable income for short period \$ 18,700  ×     12/6  Annualized income \$ 37,400  --------------------------------- ------------- Note that Mr. Heston should compute tax on \$37,400 and then pay one-half the tax (6/12 months). ------------------------------ ---------------------------------------------------------------------------------------- 3)[]{#anchor-7}[]{#anchor-8} []{#anchor-9}Which of the following would NOT be an acceptable tax year?[]{#anchor-10} ------------------------------ ---------------------------------------------------------------------------------------- Answer (C) is correct.\ A return for a period of less than 12 months is required when either a taxpayer's annual accounting period changes or a taxpayer has been in existence for only part of a tax year. Thus, a short tax year cannot occur because a business changes to the accrual method of accounting. -------------------------------- ------------------------------------------------------------------------------------------------- 4)[]{#anchor-11}[]{#anchor-12} []{#anchor-13}Which form is used to change from one required tax year to another?[]{#anchor-14} -------------------------------- ------------------------------------------------------------------------------------------------- ---------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- []{#anchor-15} Answer (C) is correct.\ Form 1128 is generally filed with the IRS to request the change in tax years. Permission to change tax years is normally granted when a substantial business purpose exists. However, when the sole purpose of the change is to obtain a favorable tax status, the substantial business purpose test is not met. Only partnerships, S corporations, and PSCs may change to a tax year other than a required tax year. To do so, the partnership, S corporation, or PSC files Form 8716. ---------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- -------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 5)[]{#anchor-16}[]{#anchor-17} []{#anchor-18}An S corporation engaged in manufacturing has a year end of June 30. Revenue consistently has been more than \$30 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year end. Which of the following statements is correct if it changes to a C corporation?[]{#anchor-19} -------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Answer (B) is correct.\ C corporations that are not personal service corporations, S corporations, or small C corporations (less than an average of \$29 million in revenues per year over the past 3 years) must use the accrual basis of accounting. A corporation can use a fiscal year end; June 30 is therefore allowed. -------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ 6)[]{#anchor-20}[]{#anchor-21} []{#anchor-22}Mr. Jones has an adjusted gross income of \$40,000 and itemized deductions of \$16,000 for the 6-month period from January 1 through June 30, 2023. Mr. Jones received an approved change to his tax year, and he must file a short tax year return. What is the taxable income amount that Mr. Jones must use to compute his short year return?[]{#anchor-23} -------------------------------- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Answer (D) is correct.\ Publication 538 states, "Income tax for a short tax year must be annualized. . . . An individual must figure income tax for the short tax year as follows. 1. Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. You must itemize deductions when you file a short-period tax return.... The result is your modified taxable income. 2. Multiply the modified taxable income in (1) by 12, then divide the result by the number of months in the short tax year. The result is your annualized income." Therefore, the taxable amount of income Mr. Jones must use to compute his short year tax return is \$48,000. ---- ---------------------- --- ---------- 1. \$40,000 -- \$16,000 = \$24,000 2. \$24,000 × 12 ÷ 6 = \$48,000 ---- ---------------------- --- ---------- -------------------------------- ---------------------------------------------------------------------------------------------------- 7)[]{#anchor-24}[]{#anchor-25} []{#anchor-26}Which of the following must adopt the calendar year as their tax year?[]{#anchor-27} -------------------------------- ---------------------------------------------------------------------------------------------------- Answer (C) is correct.\ The taxpayer's tax year must be the calendar year if the taxpayer keeps no books, has no annual accounting period, or has an accounting period other than a calendar year that does not qualify as a fiscal year. -------------------------------- --------------------------------------------------------------------------------------------------------- 8)[]{#anchor-28}[]{#anchor-29} []{#anchor-30}Which of the following dates would NOT be considered the end of a tax year?[]{#anchor-31} -------------------------------- --------------------------------------------------------------------------------------------------------- Answer (C) is correct.\ A calendar year is a period of 12 months ending on December 31. A fiscal year is a period of 12 months ending on the last day of any month other than December, or a 52- or 53-week tax year. A fiscal year will be recognized only if it is established as the taxpayer's annual accounting period and only if the books are kept in accord with it. The taxpayer may elect to use a fiscal tax year that varies from 52 to 53 weeks if such period always ends on the same day of the week, either the last such day in a calendar month or the closest such day to the last day of a calendar month (Publication 538). -------------------------------- -------------------------------------------------------------------------------------------- 9)[]{#anchor-32}[]{#anchor-33} []{#anchor-34}All of the following tax years are acceptable tax years EXCEPT[]{#anchor-35} -------------------------------- -------------------------------------------------------------------------------------------- Answer (A) is correct.\ Under Sec. 441(e), a fiscal year is a period of 12 months ending on the last day of any month other than December. --------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- 10)[]{#anchor-36}[]{#anchor-37} []{#anchor-38}One of the elections a new corporation must make is its choice of an accounting period. Which of the following entities has the most flexibility in choosing an accounting period? []{#anchor-39} --------------------------------- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Answer (A) is correct.\ Generally, C corporations may elect either a calendar or fiscal tax year, S corporations and personal service corporations are required to use a calendar year, and partnerships must use a "required" tax year.