- 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.
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.
- 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.
- 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.