An accounting method is set of rules to determine when income and expenses are reported. A taxpayer chooses an accounting method upon filing of the intial tax return for an entity. The cash method is the most common, however if a business keeps an inventory it must use the accrual method for sales and purchases. With the cash method, income is reported when the taxpayer actually or constructively receives income.
The accrual method of accounting reports income in the year earned and deducts or capitalizes expenses in the year incurred. The purpose of the accrual method is to match income and related expenses in the same year. With the accrual method, income is recognized when the payment is received, income amount is due to the taxpayer, taxpayer earns the income, or the property title has passed. For instance a taxpayer can record income on the accrual method months before the cash is received (especially is nice to smooth earnings) with accounts receivable. Accounts receivable are a current asset, the debit on the balance sheet for amounts credited to revenue. However, transactions amount paid to related parties on the cash method must handled on the cash basis. For tax purposes an company will make an M-1 adjustment for this if the transaction laps the tax year.
Thursday, July 7, 2011
Thursday, June 30, 2011
Sale of Partnership Interests
Price appreciation or depreciation realized by a partner on partnership basis results in a tax consequence upon sale of a partnership interest. A partners basis is equal to the initial contribution of cash and property or initial basis interest plus partnership adjustments from subsequent activities. If a partnership holds unrealized receivables or inventory these items are taxed at ordinary rates, where as capital assets are taxed a capital gains rates - determined by the holding period of the asset.
When sale of a partnership interest occurs mid year, economic activity must be computed as of the day of sale of interest. For example a partner who sells his 25% holding in a partnership on June 30th would receive a K-1 with the partnerships activities for the first two quarters of the year. These amounts would be special allocation determined either by an accounting software P&L as of 6/30 or similar activity. The K-1 would be marked final. The partner would record on his 1040 either a gain or loss from sale of partnership interest - capital gains on Schedule D and sale of hot assets on from 4797. A partnership with real estate would record gain based upon the holding period of the asset and depreciation received by the partner would be ordinary income recapture to beginning ownership basis.
To compute the gain on sale of partnership assets, create a spreadsheet showing adjusted basis in one column and FMV in another with resulting gain in the third column multiplied by adjusting tax rates. The agreement of sale of partnership interest can allocate sale price according to assets (and likely the best) so as obtain the customized tax attributes. In other words, depending upon the asset combination of the partnership, you can sell ordinary gain assets at cost and allocate the gains to capital items.
When sale of a partnership interest occurs mid year, economic activity must be computed as of the day of sale of interest. For example a partner who sells his 25% holding in a partnership on June 30th would receive a K-1 with the partnerships activities for the first two quarters of the year. These amounts would be special allocation determined either by an accounting software P&L as of 6/30 or similar activity. The K-1 would be marked final. The partner would record on his 1040 either a gain or loss from sale of partnership interest - capital gains on Schedule D and sale of hot assets on from 4797. A partnership with real estate would record gain based upon the holding period of the asset and depreciation received by the partner would be ordinary income recapture to beginning ownership basis.
To compute the gain on sale of partnership assets, create a spreadsheet showing adjusted basis in one column and FMV in another with resulting gain in the third column multiplied by adjusting tax rates. The agreement of sale of partnership interest can allocate sale price according to assets (and likely the best) so as obtain the customized tax attributes. In other words, depending upon the asset combination of the partnership, you can sell ordinary gain assets at cost and allocate the gains to capital items.
Tuesday, June 28, 2011
Individual Retirement Accounts
The two most popular retirement accounts are traditional and Roth IRA's. An employee may have a traditional IRA even if covered by an employer-sponsored retirement plan. Contributions to IRA's are limited to the lesser: a.)the participants compensation b.) statutory limits. Contributions cannot be made in a year the participants has reached age 70 1/2 or for any later year. Contributions can be $5,000 for individuals under age 50, and $6,000 for age 50 and older.
A traditional IRA contribution is deductible from income and distributions are taxed. A Roth IRA is subject to the same rules a traditional but the contributions are not deductible, yet the distributions are tax free. For younger taxpayers, Roth investment accumulations may provide a more advantageous way to reel in substantial non-taxed capital gains.
IRA investments can be made in mutual funds, brokerage companies, life insurance companies and other financial institutions. An IRA cannot invest invest in collectibles such as artwork, gems or stamps.
An excess contributions occurs when a taxparers contributes an amount that exceeds the statutory or participant compensation amounts. A 6% penalty applies each year the excess remains in the account. Form 5329 is used to calculate and pay the penalty.
A Simplified Employee Pension is a, IRA for businesses were employees can contribute up to 25% of wages to $49,000 and Self employed individuals can contribute 20% of net SE income after one half SE tax deduction, up to $49,000.
A traditional IRA contribution is deductible from income and distributions are taxed. A Roth IRA is subject to the same rules a traditional but the contributions are not deductible, yet the distributions are tax free. For younger taxpayers, Roth investment accumulations may provide a more advantageous way to reel in substantial non-taxed capital gains.
IRA investments can be made in mutual funds, brokerage companies, life insurance companies and other financial institutions. An IRA cannot invest invest in collectibles such as artwork, gems or stamps.
An excess contributions occurs when a taxparers contributes an amount that exceeds the statutory or participant compensation amounts. A 6% penalty applies each year the excess remains in the account. Form 5329 is used to calculate and pay the penalty.
A Simplified Employee Pension is a, IRA for businesses were employees can contribute up to 25% of wages to $49,000 and Self employed individuals can contribute 20% of net SE income after one half SE tax deduction, up to $49,000.
Monday, June 27, 2011
Filing Gift Tax Return
A form 709 Gift Tax Return must be filed by April 15th if a tax payer has made a gift in excess of $13,000 to anyone other than a spouse or charity during the tax year. Gifts in excess of $13,000 or gifts of future interests of value in excess of $13,000 must be reported. Their is a lifetime gift tax exclusion of $5,000,000 for taxpayers who gifts in excess of $1,000,000 for duration.
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