1 C Corporations Have The Most Flexibility In Choosing The Calendar ✓ Solved
1) C Corporations have the most flexibility in choosing the calendar, fiscal, or 52/53-week year-end, while sole proprietorships and flow-through entities (like partnerships and S Corporations) are more limited (Spilker, et al., 2021). Since sole proprietorships’ business income are reported on individual proprietors’ tax returns, they are subject to the calendar-year end (Spilker, et al., 2021). Flow-through entities must adopt tax year ends consistent with those of their owners and thus, would likely result in a calendar-year end (Spilker, et al., 2021). Expenditures for tangible assets, the cost to create intangible assets, and prepaid expenses (with the 12-month rule and recurring item exceptions) must be capitalized (Spilker, et al., 2021).
Tangible asset expenditures include buildings, machinery, equipment, furniture, fixtures, and like properties with a useful life of greater than 12 months, while capitalized intangible asset expenditures include patents, goodwill, start-up costs, and organizational expenditures (Spilker, et al., 2021). No, I do not agree that all business expenditures should be deducted when incurred for tax purposes. Ultimately, either way, the same amount will be deducted and paid in taxes. However, if business expenditures were deducted for tax purposes when incurred, companies (of all levels) would be motivated to bulk expenditures into one year. Although the subsequent deferred liabilities for companies would eventually even out, the government may be subject to increased financial strain in the meantime, because of the time value of money.
Further, individual taxpayers filing their sole proprietorships may be reimbursed by the government for subsequent net losses after all deductions (business and personal) and credits are applied. These reimbursements are rarely recouped in practice, so tax income would be lost in such cases. Finally, recapturing depreciation or amortization expenses on assets sold before the end of useful life would become more difficult to compute with lump deductions. Reference List: Spilker, B. C., Ayers, B.
C., Lewis, T. K., Weaver, C. D., Barrick, J. A., Robinson, J. R., Worsham, R.G. (2021).
McGraw-Hill’s taxation of individuals and business entities. New York, NY: McGraw Hill LLC. 2) Compare and contrast the different year-ends to sole-proprietorships, flow-through entities, and C Corporations. Sole-proprietorships, flow-through entities, and C corporations are provided with different year-end they could use to pay their taxes for their businesses in a year. First is the calendar year-end December 31 and starts on January 1.
If the fiscal year of a company ends on December 31, then it is using the calendar year as its business tax year. The calendar year-end is preferred by sole-proprietors and is suggested to them because of its simplicity unless they are allowed by the IRS to use the other methods. Second is the fiscal year-ends; it is preferred by the C corporations and flow-through entities. The fiscal year is the financial year. It does not end on December 31 but instead, in the middle of the year.
The duration of filing a tax return is the 15th day of the third month of a fiscal year; for example, if the year ended on March 1, the tax return will be filed on June 15. Companies that choose the fiscal year method must also maintain their reporting income and expenses at the same time. A fiscal year is also known as 52 to 53 weeks period. They do not end on the last days of the year but instead, on the same days of every year. 2.
Explain when an expenditure should be “capitalized†based upon accounting principles. From time to time, it is suggested that all business expenditures should be deducted when incurred for tax purposes. Do you agree with this position? Please explain your position. Capitalization of expenditures is dependent upon different things.
If a business is using the cash method, it will be capitalizing their expenditures if it does not qualify for the 12-month rule. There are certain requirements that must be met for qualifying for the 12-month rule. One is that the future benefit of expenditure must not go above the end of a tax year. Second, the benefit of the expenditure must not exceed 12 months. Businesses that use the accrual method for capitalization must meet the uniform capitalization rule.
Paper for above instructions
Title: Tax Year-End Flexibility and Expenditure Capitalization in C Corporations versus Sole Proprietorships and Flow-Through EntitiesIntroduction
The taxation mechanisms governing different business entities in the United States significantly influence their strategic planning and operational choices. C Corporations, sole proprietorships, and flow-through entities (such as partnerships and S Corporations) exhibit diverse characteristics concerning the choice of tax year-end and the treatment of expenditures. Understanding these differences is crucial for business owners to optimize their tax positions, manage cash flows, and comply with regulatory frameworks.
C Corporations’ Flexibility in Choosing Tax Year-End
C Corporations enjoy substantial flexibility when it comes to selecting their fiscal year-end. According to Spilker et al. (2021), C Corporations can choose a calendar year (ending December 31), a fiscal year (ending on a date other than December 31), or even opt for a 52/53-week accounting period. This flexibility allows C Corporations to align their financial reporting with their business activities, operational cycles, and cash flow considerations, facilitating better financial management (Spilker et al., 2021).
While C Corporations have the freedom to choose their year-end based on business requirements, it comes with the obligation to ensure that the chosen fiscal year aligns with the internal and external reporting standards (Spilker et al., 2021). This choice provides a strategic advantage, allowing these corporations to manage their taxable income in a manner that optimizes their cash flow, aligns with revenue cycles, and ultimately minimizes tax liabilities.
Limited Options for Sole Proprietorships and Flow-Through Entities
In contrast to C Corporations, sole proprietorships and flow-through entities face considerable limitations in choosing their tax year-end. Sole proprietorships are obliged to use the calendar year for tax reporting since their business income is reported on the individual's tax returns (Spilker et al., 2021). The implications of this requirement can be profound, as it may not coincide with the company's operational needs or revenue cycles.
Flow-through entities must align their tax years with those of their owners, often resulting in a calendar year-end. Such restrictions may impede flexibility in cash flow management and tax optimization strategies compared to their C Corporation counterparts (Spilker et al., 2021). Therefore, the inability to select an alternative year-end may limit opportunities for deferring income or accelerating expenses in response to market conditions or business needs, thus affecting the overall strategic planning process for smaller or pass-through enterprises.
Capital Expenditures and Accounting Principles
Capitalization versus deduction of business expenditures is another critical distinction across business entities. Whether an expenditure should be capitalized depends on various factors, including the nature of the asset, its useful life, and the method of accounting employed by the business.
Expenditures for tangible and intangible assets, with a useful life extending beyond one year, must be capitalized. Examples include buildings, machinery, patents, and start-up costs (Spilker et al., 2021). This approach adheres to the matching principle in accounting, wherein costs are spread over the useful life of the asset, and reflects the true financial position of the business in its financial statements (Spilker et al., 2021).
Businesses using the cash accounting method must capitalize expenditures exceeding the stipulated thresholds, while those employing the accrual method must abide by the uniform capitalization rules. The 12-month rule plays a crucial role in determining the treatment of expenditures as well; if an expenditure yields benefits extending beyond one tax year, the paramount principle necessitates capitalization (Spilker et al., 2021).
The Debate Over Immediate Deduction of Expenditures
The notion that all business expenditures should be deducted when incurred presents both merits and drawbacks. Advocates argue that such a practice would enhance cash flow by reducing immediate tax liabilities and providing businesses with a straightforward accounting method (Spilker et al., 2021). Indeed, this perspective aligns with the potential for increased reinvestment in the business, fostering growth and expansion.
However, I do not agree with the assertion that all expenditures should be deducted immediately for tax purposes. Allowing for immediate deductions indiscriminately could result in substantial systemic issues. The primary concern lies in the propensity for businesses to bulk expenditures into a single tax year, potentially creating significant fluctuations in taxable income from one year to the next (Barth, et al., 2019).
In effect, this could strain government resources and disrupt the predictability of tax revenues. The time value of money indicates that the government may face financial strain due to delayed tax payments as companies would leverage these immediate deductions to defer cash outflows (Miller & Janson, 2020). Furthermore, the complexities stemming from recapturing depreciation or amortization expenses could complicate compliance and reporting for both businesses and regulatory agencies.
Moreover, while individual taxpayers may experience incidentals through reimbursement of net losses, this rarely translates into recovered tax income for the government when accrued losses are offset. Consequently, systemic tax income would risk substantial erosion over time if immediate deduction principles were adopted wholesale (Hanlon, et al., 2018).
Conclusion
Understanding the variances in tax year-end selection among C Corporations, sole proprietorships, and flow-through entities illuminates the strategic considerations inherent to business structuring and financial management. C Corporations maintain significant flexibility in choosing tax year-end, which can optimize operational decisions, while sole proprietorships and flow-through entities have imposed limitations.
Moreover, the need for careful treatment of expenditures under capitalizing principles ensures alignment with accounting standards and tax obligations. While the debate over immediate deductions is ongoing, a balanced approach may better serve both the needs of businesses and the financial stability of government entities.
References
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