Chapter
6
Taxable Income from
Business Operations
Accrual Method of Accounting
Under the accrual method, report income when
the right to the income and the amount of the
income can be determined with reasonable
accuracy. Is usually triggered by a transaction.
Called the Realization Principle:
Recall from ACCT 5301 that this can lead to abusive
behavior for financial reporting purposes—there is a tax
cost associated with accelerating revenue.
This can be a very significant issue
See Shea Homes v. Commissioner
(http://www.reuters.com/article/usa-tax-sheaidUSL2N0LH24C20140214)
Deduction Of Expenses Under Accrual Method Of
Accounting
MATCH expenses against revenues. Deduct when
ALL EVENTS have occurred that determine the
existence of the liability and the amount of the
liability can be determined with reasonable
accuracy.
Important exception—allowance method for bad
debts and warranties not allowed for tax purposes,
regardless of taxpayer’s method of accounting.