Business/Tax Research Assignment

BUSINESS/TAX RESEARCH ASSIGNMENT

1. For the Tax year 2004, is SK eligible to switch from the accrual to cash method of accounting under Rev. Proc. 2001-10?

This revenue procedure applies to taxpayer with "average annual gross receipts" of $1,000,000 or less. Since SK's average annual gross receipt is greater than 1,000,000 for 2004 therefore SK is not eligible to switch from the accrual to cash method of accounting. ( Rev. Proc. 2001-10,2001-1 CB 272)

2. For the tax year 2004, is SK eligible to switch from the accrual to cash method of accounting under Rev. Proc. 2002-28?

This revenue procedure applies to a qualifying small business taxpayer as defined in section 5.01 with average gross receipts of $10,000,000 or less that is not prohibited from using cash method under Section 448. Since SK's average gross receipts for 2004 is less than 10,000,000 therefore SK is eligible to switch from the accrual to cash method of accounting. . (Rev. Proc. 2002-28, 2001-1 CB 815-5.01)

3. SK has on hand a large quantity of "funeral linens" that are used to prepare its clients for viewing, and are not re-used. SK has been expensing these linens as they are acquired. May SK expense the cost linens as they are acquired if it remains on the accrual method of accounting? If it adopts the cash method of accounting.

Under either method of accounting as long as the cost of such material and supplies have not been deducted in determining the net income or loss or taxable income for any previous year. (Reg. Section 1.162-3)

4. What is SK's NAICS number?

81221 Funeral Homes and Funeral Services

(www.Census.gov and Rev. Proc.2002-28, 2001-1 CB 815, 4.01(1) (a) (v))

5. For SK what is the difference (in concept, not in numbers) between its"gross receipts" and its "gross income"?

The differences between SK's gross income and gross receipts are that the gross receipts for the tax year equal all receipts derived from all of the SK's businesses that must be recognized under the method of accounting actually used by SK, for that tax year for federal income tax purposes. Thus Gross receipts are revenues from business whereas Gross Income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. (Reg. section 1.61-1(a) and rev. proc. 2001-10, 2001-1CB 272, 5.02)

6. Assume SK began business in August, 2002.Apply the gross receipts test to determine if it is eligible for the $1,000,000 or less gross receipts exception for using the cash method of accounting.

((1,233,000*12)/5=2,959,200+1,145,000)/2=2,052,100

Since SK's average gross receipt is greater than $1,000,000 therefore SK is not eligible for using the cash method accounting. (Rev. Proc. 2001-10, 2001-1 CB)

7. SK uses the accrual method of accounting for book and tax purposes. Would it qualify to use the cash method of accounting for tax purposes if it continued to use the accrual method for book purposes?

Taxable income shall be computed under the method of accounting on the basis of which SK regularly computes its income in keeping its books. Therefore SK cannot use Cash method of accounting for Tax purposes. (Internal Revenue Code Section 446(a) and Regulation 1.446-1(c) (2) (i)

8. Assume SK's 2001 tax year is under audit by the IRS. How does this impact how does SK makes the change to the cash basis of accounting?

According

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