Federal Tax Accounting (2023)

Federal Tax Accounting advises tax preparers, accountants, attorneys, and other professionals about timing issues, i.e. when an item, such as income, deduction, or credit may be reported on a tax return. Tax accounting rules govern the tax incidents of when tax events must be taken into account for federal income tax purposes. The when question is the subject of this book. In general, tax accounting is not concerned with whether an item is includable in income or deductible or even with the character of the item but when it may be reported.

This book answers the following issues which relate to timing:

• Under the annual accounting doctrine, should tax accounting be transactional or periodic?
• Should an item of income be considered income upon receipt even though the taxpayer might be obligated to return the item? What if the item is in dispute; should it be picked up as income or be deferred?
• If a taxpayer takes a deduction in a previous year but recovers the item in a subsequent year, should the item recovered be income?
• If the taxpayer dissolves his corporation and recognizes capital gain and is obligated to pay a liability of the corporation, is the deduction ordinary or capital?
• What tax year should a partnership, S corporation, personal holding company or regular corporation use? What are the alternatives for the taxpayer? Can taxpayers make elections to use tax years other than those that are required?
• If the taxpayer is using an erroneous tax year, how is the error corrected?
• What are the requirements for choosing methods of accounting?
• How does a taxpayer adopt a method of accounting?
• Should the taxpayer be using the cash method of accounting; if so how should the taxpayer maintain his books? How should the books clearly reflect income?

This and much more is the subject of Federal Tax Accounting.

Tax accounting rules are found in all areas of federal income tax. These rules often involve many issues that are visible and, in some cases, invisible, governing items that are includable in income, deductible or creditable. Many of the issues that arise in an audit depend on resolution of tax accounting issues. As a result tax accounting issues have become more and more important and receive more scrutiny in determining tax policy. Tax practitioners need to have a thorough understanding of tax accounting to be able to analyze and solve tax problems.

Over the years tax accounting has become more and more complex as the need for revenue has increased. The tax accounting rules do not always match up with generally accepted accounting principles and, in fact, often deviate from them. The goal of tax accounting is to produce income and to protect government revenue as opposed to informing the public of information necessary for a financial decision.

Tax accounting is not transactional but periodic which means that on an annual basis taxpayers must determine whether they have income or losses. There are several ameliorative provisions such as net operating losses, the tax benefit rule, etc. which may balance out certain tax accounting principles. Indeed, a substantial portion of every tax problem that practitioners face inevitably involves a tax accounting issue.

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