Marcia Selsor on mon 15 jan 01
Thank you, Bonnie
My husband says I taun the IRS. I have been audited 4 times. -mostly for
years of living overseas on Fulbright (government funded). It is that
time again and I hope we'll see some refunds.
Marcia
Jeremy/Bonnie Hellman wrote:
>
> Hello US Clayart Taxpayers:
>
> This change in the US tax law was discussed in the IRS Rev. Proc.
> 2000-22, issued May 15, 2000. It applies to business taxpayers with
> average annual gross receipts of $1 million or less [over the previous 3
> tax years] who are required to maintain inventory. However they are now
> freed from the requirement to use an accrual method of accounting for
> purchases and sales.
>
> The Revenue Proceedure does NOT eliminate the requirement to maintain and
> use inventories "when the production, purchase or sale of merchandise is
> an income-producing factor in the taxpayer's business." So, if your
> business requires inventories, you are still required to maintain your
> inventories, and deduct those materials and supplies in the amount that
> they are actually used in operations during the year. In other words, you
> don't get a deduction for any inventories that are unsold at the end of
> the tax year. Those amounts comprise your "ending inventory" in cost of
> goods sold, and are deducted from your purchases.
>
> As previously discussed on clayart, if you have declared your business to
> be Independent Artist, code 711510, you are exempt from the need to
> maintain inventories.
>
> The change (which was effective for tax years ending on or after Dec 17,
> 1999) now says that if you are a small business even if you maintain
> inventories, you can now get an automatic change of accounting method,
> and you may report on the cash basis of accounting, if you so choose. And
> there is a reasonably easy way to do this. A small business is defined as
> having average annual gross receipts for the 3-tax-year period ending
> with the previous tax year.
>
> The benefits are that your trade receivables are not taxable until
> collected. The disadvantage is that your expenses (trade payables) are
> not deductible until you actually pay for them. The good news is that
> charging expenses on a credit card still constitutes "paying" for tax
> purposes, even though you may not pay your credit card bill until after
> the end of your tax year. This is true for non-business and business
> deductions on your tax return.
>
> The Rev. Proc. tells how to make the cash basis election:
> 1-New businesses can just check off Cash Basis. No formal election is
> necessary.
> 2-Existing businesses that have inventory and are using the cash method
> (incorrectly)- no formal election or conversion adjustments are required.
> Essentially you have been granted amnesty.
> 3-Qualifying accrual basis taxpayers who wish to switch to the cash
> basis:
> a-You can get an automatic consent to change.
> b-You must file Form 3115 with your tax return to do this. There is no
> IRS fee for making this change. You only file this form in the first year
> you are making the switch in accounting method.
> c-Any adjustments to income (positive or negative) from adjusting
> receivables and payables, can be made in the current year IF (and only
> if) the change is less than $25,000. If the net change is $25,000 or
> over, you make the adjustment over 4 tax years.
>
> If you use the services of a tax preparer, and this applies to you (you
> fit the definition of a small business and you report on the accrual
> basis), you will want to discuss this with your tax preparer. If you fit
> the definition of a small business and you have been reporting on the
> cash basis (even if you have inventory) you don't need to do anything
> special. I have summarized the parts of Rev. Prov. 2000-22 that I thought
> would be of greatest general interest. However, it is 2 1/2 pages of
> small print, and there is more information contained therein than I've
> reported.
>
> The reason this is an issue, is that the IRS has a history of trying to
> put everyone on the accrual basis of accounting, particularly in audits.
>
> I'd originally hoped that small businesses would be completely freed of
> the need to do inventory accounting, but apparently this is not the case.
>
> Bonnie
> Bonnie D. Hellman, CPA in PA & CO
>
> PA work email: oliviatcavy@juno.com
> PA home email: mou10man@sgi.net (that's the number 10 in the middle of
> the letters)
>
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--
Marcia Selsor
selsor@imt.net
http://www.imt.net/~mjbmls
http://www.imt.net/~mjbmls/Tuscany2001.html
Jeremy/Bonnie Hellman on mon 15 jan 01
Hello US Clayart Taxpayers:
This change in the US tax law was discussed in the IRS Rev. Proc.
2000-22, issued May 15, 2000. It applies to business taxpayers with
average annual gross receipts of $1 million or less [over the previous 3
tax years] who are required to maintain inventory. However they are now
freed from the requirement to use an accrual method of accounting for
purchases and sales.
The Revenue Proceedure does NOT eliminate the requirement to maintain and
use inventories "when the production, purchase or sale of merchandise is
an income-producing factor in the taxpayer's business." So, if your
business requires inventories, you are still required to maintain your
inventories, and deduct those materials and supplies in the amount that
they are actually used in operations during the year. In other words, you
don't get a deduction for any inventories that are unsold at the end of
the tax year. Those amounts comprise your "ending inventory" in cost of
goods sold, and are deducted from your purchases.
As previously discussed on clayart, if you have declared your business to
be Independent Artist, code 711510, you are exempt from the need to
maintain inventories.
The change (which was effective for tax years ending on or after Dec 17,
1999) now says that if you are a small business even if you maintain
inventories, you can now get an automatic change of accounting method,
and you may report on the cash basis of accounting, if you so choose. And
there is a reasonably easy way to do this. A small business is defined as
having average annual gross receipts for the 3-tax-year period ending
with the previous tax year.
The benefits are that your trade receivables are not taxable until
collected. The disadvantage is that your expenses (trade payables) are
not deductible until you actually pay for them. The good news is that
charging expenses on a credit card still constitutes "paying" for tax
purposes, even though you may not pay your credit card bill until after
the end of your tax year. This is true for non-business and business
deductions on your tax return.
The Rev. Proc. tells how to make the cash basis election:
1-New businesses can just check off Cash Basis. No formal election is
necessary.
2-Existing businesses that have inventory and are using the cash method
(incorrectly)- no formal election or conversion adjustments are required.
Essentially you have been granted amnesty.
3-Qualifying accrual basis taxpayers who wish to switch to the cash
basis:
a-You can get an automatic consent to change.
b-You must file Form 3115 with your tax return to do this. There is no
IRS fee for making this change. You only file this form in the first year
you are making the switch in accounting method.
c-Any adjustments to income (positive or negative) from adjusting
receivables and payables, can be made in the current year IF (and only
if) the change is less than $25,000. If the net change is $25,000 or
over, you make the adjustment over 4 tax years.
If you use the services of a tax preparer, and this applies to you (you
fit the definition of a small business and you report on the accrual
basis), you will want to discuss this with your tax preparer. If you fit
the definition of a small business and you have been reporting on the
cash basis (even if you have inventory) you don't need to do anything
special. I have summarized the parts of Rev. Prov. 2000-22 that I thought
would be of greatest general interest. However, it is 2 1/2 pages of
small print, and there is more information contained therein than I've
reported.
The reason this is an issue, is that the IRS has a history of trying to
put everyone on the accrual basis of accounting, particularly in audits.
I'd originally hoped that small businesses would be completely freed of
the need to do inventory accounting, but apparently this is not the case.
Bonnie
Bonnie D. Hellman, CPA in PA & CO
PA work email: oliviatcavy@juno.com
PA home email: mou10man@sgi.net (that's the number 10 in the middle of
the letters)
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