Thursday, October 20, 2011

Basic Rules of Subchapter K Partnership Tax Accounting

Basic Rules of Subchapter K: Partnership Tax Accounting

§ 701 - The partnership is not a taxpayer

§§ 701 – 702- Each partner is responsible for including income, gains, deductions, and losses properly allocated to him or her in determining their income tax liability.

§ 704 - The allocation of income, gains, deductions, and losses to partners will reflect the provisions of the partnership agreement and applicable state law.

§ 721- The act of establishing a partnership, including the contribution of property by the partners to the partnership, is normally not a taxable event either to the partners or the partnership.

§ 722-  partner has a new asset- his or her interest in the partnership. The partner's adjusted basis in the partnership interest will be measured initially by the cost of the partnership interest or the adjusted basis of properties transferred by the partner to the partnership.

§ 723- The basis of contributed property is not affected by the transfer; the contributing partner's basis carries over to the partnership.

§§ 731 and 736 - Because a partner will already have paid income tax on the amount of income so attributed, distribution of property by the partnership to a partner will not generally be a taxable event, Watch out for exceptions.

§ 705 - The partner's adjusted basis in the partnership interest will be increased by partnership income and gains, and be reduced by partnership deductions and losses, allocated to the partner. Partner's adjusted basis in the partnership interest will also be reduced when the partnership distributes property to the partner.

§ 741- The partner is likely to realize a gain or loss upon the sale or exchange of the partnership interest to another.

§ 731 and 736 - The partners will recognize a gain or loss upon the liquidation of a partnership only in limited circumstances.

Different Types of Accounting Liabilities

Accountants will most likely encounter these different types of liabilities when they work for companies. All these types will fall under the general heading of "Liability" and the accounting balance sheet and must be properly categorized.

Fixed liability:  This type of liability is required to be paid of at the time of dissolution of a company is called fixed liability. The biggest examples are paid in capital, reserve and surplus.

Long-term liability:  Basically, the easiest way to categorize the are they are not payable within the next accounting period. Examples of long-term liabilities are Debentures of a company, Mortgage Loan, bonds issued, and other financing for extended periods

Current liability:  This is the most common type of liability that an accountant will encounter.  A current liability  is to be paid of in the next accounting period. Some common examples: payroll, short term creditors, bills payable, bank overdraft, telephone and internet bills.

Trade liability:  Liability which is incurred for goods and services supplied or expenses incurred is called trade liability. Examples are payments to suppliers.

Financial liability:  Liability which is incurred for financial purposes is called financial liability. Examples of financial liabilities include Bank overdraft, short term loan, interest expense.

Contingent liability:  A contingent liability is one which is not an actual liability.  but which will possible become an actual liability because of some uncertain event in the future. Some examples of contingent liabilities include receivables discounted before maturity, liability of a lawsuit that has not been resolved.

Wednesday, October 12, 2011

Differences between cash method and accrual method

Taxpayers have two primary choices that they must stick to when completing accounting records for tax returns. What are the main differences between the cash method of accounting and the accrual method of accounting for tax purposes?

The Cash Method

The cash method of accounting has a focus on money our and money in. For example, a taxpayer has income when she receives a payment from a buyer. The taxpayer has a deduction when they make payment.

The Accrual Method

Oppositely, the accrual method of accounting focuses more on legal rights and obligations: An item is considered income when the right to receive it is earned. An item is deductible when the taxpayer becomes liable to pay the item.

It is important to note that individual taxpayers are generally required to use the cash method of accounting. Certain taxpayers must use the same method of accounting for tax purposes as they use to keep their books.

Popular Accounting Problems

The information on this site is for informational purposes only and should not be used as a substitute for the professional advice of an accountant, tax advisor, attorney, or other professional.