Subchapter D - Accounting Periods And Methods Of Accounting

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Section 441

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Period for computation of taxable income

A tax year is:

(1) The period for which a return is made, if a return is made for a period of less than 12 months (i.e., a short period);
(2) Except as provided in (1), the taxpayer's required tax year, if applicable;
(3) Except as provided in (1) and (2), the taxpayer's annual accounting period, if it is a calendar year or a fiscal year; or
(4) Except as provided in (1) and (2), the calendar year, if the taxpayer keeps no books, does not have an annual accounting period, or has an annual accounting period that does not qualify as a fiscal year.

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Section 442

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Change in annual accounting period

If a taxpayer changes his annual accounting period, the new accounting period becomes the taxpayer's taxable year only if the change is approved by the Secretary.

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Section 443

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Returns for a period of less than 12 months

If you change your tax year or if you have not been in existence the full year, you have to file a short-year tax year.

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Section 444

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Election of taxable year other than required taxable year

A partnership, S corporation, or a personal service corporation not currently using a required tax year can elect to use a tax year that is different from the required tax year or different from the tax year for which the entity can establish a business purpose approved by IRS. This is the commonly known “section 444 election” which is a one- time election and subject to four key restrictive provisions dealing with: (1) the three- months or less deferral period, (2) the tax pre-payment requirement for partnerships and S corporations, (3) the deduction limitations for personal service corporations, and (4) the tiered structure limitation.

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Section 446

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General rule for methods of accounting

Taxpayers must compute their taxable income under the method of accounting on the basis of which they regularly compute their income in keeping their books.

In other words, taxpayers must compute their income for income tax purposes by using the same accounting method they use to compute their income for book purposes.

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Section 447

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Method of accounting for corporations engaged in farming

Generally, the taxable income from farming of a corporation engaged in the trade or business of farming, or a partnership engaged in the trade or business of farming if a corporation is a partner in such partnership, must be computed on an accrual method of accounting

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Section 448

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Limitation on use of cash method of accounting

Generally, a C corporation; partnership having a C corporation as a partner; or
a tax shelter cannot use the cash receipts and disbursements method of accounting.

There's an exception for C corps and Partnerships that have gross receipts of less than 5mm

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Section 451

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General rule for taxable year of inclusion

The amount of any item of gross income is included in gross income in the tax year in which received by the taxpayer (i.e. a cash method taxpayer), unless, under the method of accounting used in computing taxable income, the amount is to be properly accounted for as of a different period.

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Section 453

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Installment method

Installment reporting generally automatically applies to a qualified sale unless the taxpayer elects not to have the installment method apply.

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Section 453A

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Special rules for nondealers

Generally, nondealer sales of property on the installment method require:

(1) Interest to be paid on the deferred tax attributable to installment obligations, and
(2) application of certain pledging rules.

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Section 453B

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Gain or loss on disposition of installment obligations

Gain or loss on the disposition of an installment obligation is considered as arising from the sale or exchange of the property with respect to which the obligation was received.

Thus, if the original sale of the property resulted in a capital gain or loss, the gain or loss on the disposition of the installment obligation would also result in capital gain or loss.

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Section 454

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Obligations issued at discount

Interest on U.S. savings bonds is not taxable for federal income tax purposes until the bonds are redeemed. However, a cash basis taxpayer can elect to report the interest each year.

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Section 455

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Prepaid subscription income

An accrual basis publisher, or a publisher using a “combination” method of accounting, can elect to defer prepaid subscription income.

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Section 456

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Prepaid dues income of certain membership organizatitons

The Code gives certain membership organizations an election to defer prepaid dues income over the period of liability for services or privileges, but not to exceed 36 months.

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Section 457

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Deferred compensation plans of state land local goverrnments and tax-exempt organizations

The gain from the disposition of property held in a section 457 plan is not taxable until provided for under the Code Sec. 457 rules.

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Section 458

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Magazines, papersbacks and records returned after the close of the taxable year

A taxpayer (i.e., a publisher or distributor of magazines, paperbacks and records) who is on the accrual method of accounting may elect not to include in gross income for the tax year the income attributable to the qualified sale of any magazine, paperback, or record which is returned before the close of the merchandise return period.

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Section 460

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Special rules for long-term contracts

In general, under Code Sec. 460, taxable income from “long-term contracts” must be determined under the percentage of completion method and are subject to various cost allocation rules.

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Section 461

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General rule for taxable year of deduction

You have to take your deductions or credits in the taxable year which is the proper taxable year under the method of accounting used in computing taxable income. (This is the economic performance rule; i.e., Economic performance with respect to a particular liability generally occurs when all activities have been performed that are required to satisfy that liability.)

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Section 464

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Limitations on deductions for certain farming expenses

Section 464 imposes complex, but limited, restrictions on a cash method taxpayer's deductions for prepayments for farm supplies, including the costs of poultry.

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Section 465

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Deductions limited to amount at risk

Taxpayer subject to the at-risk rules are considered at risk for an activity to the extent of the sum of the following amounts:

(1) money contributed to the activity, (2) the adjusted basis of property contributed to the activity; and
(3) amounts borrowed with respect to the activity if the borrowed amounts satisfy certain requirements.

Generally, § 465 does not apply to corporate taxpayers other than: (1) S corporations and (2) certain closely held C corporations in which five or fewer individuals own more than 50 percent of the stock.

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Section 467

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Certain payments for use of property and services

If a lease constitutes a Code Sec. 467 rental agreement (i.e., tang. prop. with a deferral/prepaid aspect such as increasing/decreasing/prepaid rent), both the lessor and lessee must take into account for each taxable year the sum of the amount of rent that accrues during that taxable year as determined under Code Sec. 467(b) and interest on rent that accrued in prior taxable years but which remains unpaid.

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Section 468

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Special rules for mining and solid waste reclamation and closing costs

Where a utility which operates a nuclear power plant elects under Code Sec. 468(a) to contribute and deduct amounts transferred to a nuclear decommissioning fund, the contribution will be considered to be a sale or exchange of the property transferred

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Section 468A

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Special rules for nuclear decommissing costs

A utility can deduct actual or deemed cash payments that it makes to a decommissioning fund in the tax year in which they are made or considered made.

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Section 468B

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Special rules for designated settlement funds

The Code provides an explicit mechanism which allows irrevocable payments to a designated settlement fund, that extinguishes the tort liability of the payor, i.e., taxpayer, to constitute economic performance with respect to the liability. As such, qualified payments made to a designated settlement fund can be deducted by an accrual basis taxpayer at the time the payment is made to the fund.

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Section 469

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Passive activity losses and credits limited

Closely held C corporations (more than 50 percent of the value of their outstanding stock is owned directly or indirectly by not more than five individuals) and personal service corporations generally are subject to the passive loss limitations. Thus, losses and credits from business activities in which the corporation does not materially participate generally can be offset only against income and tax liabilities attributable to such passive activities. Any unused losses or credits can be carried over to the next year, subject to the same passive loss limitations.

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Section 470

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Limitation on deductions allocable to proeprty used by governments or other tax-exempt entities

A “tax-exempt-use loss” for any tax year is not allowed. A tax-exempt use loss is, for any tax year, the amount (if any) by which:

(1) the sum of the aggregate deductions (other than interest) directly allocable to a tax-exempt use property plus the aggregate deductions for interest properly allocable to the property, exceed
(2) the aggregate income from the property

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Section 471

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General rules for inventories

Whenever, in the opinion of IRS, the use of inventories is necessary in order to determine clearly the income of any taxpayer, the taxpayer must use inventories on whatever basis IRS may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and that most clearly reflects income.

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Section 472

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Last-in, first-out inventories

A taxpayer's change to, and use of, LIFO must be made in accordance with Treasury regs. A taxpayer may not change to the LIFO method unless at the time he applies to make the change he agrees to the adjustments that IRS upon examination of the taxpayer's returns may consider necessary in order to clearly reflect income. Adjustments may be required incident to the change to or from that method, or incident to the use of that method, in the inventories of earlier tax years or otherwise. Use form 970.

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Section 473

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Qualified liquidations of LIFO inventories

In certain situations, taxpayers can be forced to liquidate inventory carried under the last in, first out (LIFO) method. An inventory can be liquidated as the result of the taxpayer's inability to replace inventory on account of (1) a governmental directive concerning energy supplies or any embargo; (2) an international boycott; or (3) other major foreign trade interruptions. If such an involuntary liquidation occurs and replacement inventory is acquired, Section 473 allows the taxpayer to elect to adjust gross income for the taxable year.

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Section 474

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Simplified dollar-value LIFO method for certain small businesses

An eligible small business may elect to use the simplified dollar-value method of pricing inventories for purposes of the LIFO method.

Under this simplified method, a taxpayer uses multiple pools in order to avoid the construction of weighted-average indexes that otherwise must be separately constructed for each taxpayer.

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Section 475

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Mark to market accounting methods for dealers in securities

Section 475 requires securities dealers annually to mark-to-market their securities and report the accrued gains and losses even though no realization event has occurred. Securities inventories thus are maintained at fair market value, although subject to a few exceptions, § 475 applies both to inventory and other securities owned by the dealer

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Section 481

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Adjustments required by changes in method of accounting

The Commissioner's prior consent is required before any member will be permitted to change its method of accounting. Any such change will subject the member to adjustments in income required by Section 481(a).

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Section 482

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Allocation of income and deduction among taxpayers

Where the same interests own or control two or more organizations, trades, or businesses, IRS may distribute, apportion, or allocate gross income, deductions, credits, or allowances, between those organizations, trades, or businesses, if IRS determines that the distribution, apportionment, or allocation is necessary to prevent evasion of taxes or clearly to reflect income of any organization, trade, or business. The standard to be applied is that of a taxpayer dealing at arm's length with an uncontrolled tax payer. The arm's length result of a controlled transaction must be determined under the method that provides the most reliable measure of an arm's length result (“best method”).

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Section 483

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Interest on certain deferred payments

Section 483 applies to a debt instrument issued in a sale or exchange of property only if the instrument is excepted from § 1274 and is neither traded on established market nor issued for property so traded. Moreover, § 483 is inapplicable unless (1) at least one payment is due more than one year after the sale or exchange and (2) the contract does not provide adequate stated interest. In most cases, stated interest is adequate if it is at a rate that equals or exceeds the lesser of 9 percent or the AFR.

If stated interest under an instrument subject to § 483 is not adequate, a portion of the stated principal is recharacterized as unstated interest.