@074 CHAP ZZ 旼컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� � TAX ACCOUNTING METHODS � 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴� @Q "Never trust a naked certified public accountant. @Q Or one with clothes on." -- Jenkins' Fifth Law @Q of Business Survival (by Michael D. Jenkins, @Q CPA & Attorney) The primary accounting methods businesses are allowed to use for income tax purposes are the cash receipts and dis- bursements method ("CASH BASIS") and the accrual method ("ACCRUAL BASIS"). However, certain taxpayers may be al- lowed to use some hybrid combination of the two, such as reporting inventory-related sales and purchases on an ac- crual basis while reporting service income and miscellan- eous other expenses on the cash basis. There are also special methods of accounting, such as 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 bene- fits 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 con- tracts and certain home or residential construction con- tracts. 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 contrac- @IF154xx]ting business, you may want to consider the possibility of @IF154xx]using 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 re- @IF101xx]ceipts 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 me- thods 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 in- ventories, 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 in- ventory 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 com- @IF143xx]pany is a tax-deferral strategy that may be worth consider- @IF143xx]ing, 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 re- quire a lot of expensive accounting talent, a simplified version of LIFO may be used by companies with under $5 mil- lion 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 in- cluded in the cost of inventory (for both FIFO and LIFO taxpayers). @IF101xx]These rules apply not only to businesses that create inven- @IF101xx]tories, but also to wholesalers and retailers who purchase @IF101xx]goods for inventory, where such firms have over $10 million @IF101xx]a year in average annual sales (during the past 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 annu- @IF105xx]al sales of @NAME are $10M or less. @IF105xx] Note that the uniform capitalization rules also apply to ex- penses incurred in construction and development activities. With regard to inventory, the new rules require businesses to capitalize not only direct costs of acquiring or produc- ing inventory, but also a number of kinds of indirect costs that were previously allowed as deductions, before the Tax Reform Act of 1986. The new law (as 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 follow- ing completion of the manufacturing of a product to be allo- cated as indirect costs. Wholesalers and retailers (other than small firms exempt from the uniform capitalization rules) are now required to allocate costs incident to pur- chasing inventory (such as wages of employees who do pur- chasing), repackaging, assembly and other costs incurred in processing goods while in the taxpayer's possession; costs of storing goods (rent, insurance premiums, taxes attribut- able to a warehouse, etc.); and the portion of general and administrative costs allocable to these functions. In short, the new Uniform Capitalization rules are an account- ing 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 bus- iness. 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