Account Labeling

Technical topics regarding tax preparation.
#21
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...and if your cash-basis corporate or partnership return would show a negative cash-in-bank-account because you needed some deductions and wrote checks for them [like on December 31st] that overdrew the bank account, don't show the negative cash balance on the line for cash, show it as a short term liability instead, on the tax return, and maybe even also in the GL. My understanding was that IRS auditors were trained - this would be fifty years ago, ok? - to pursue negative numbers shown in cash so they could deny the deductions claimed for those checks that were dated the last week of December... The negative cash balance was an audit flag. 8-) :o 8-)
 

#22
LW25  
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Spell Czech wrote:...and if your cash-basis corporate or partnership return would show a negative cash-in-bank-account because you needed some deductions and wrote checks for them [like on December 31st] that overdrew the bank account, don't show the negative cash balance on the line for cash, show it as a short term liability instead, on the tax return, and maybe even also in the GL. My understanding was that IRS auditors were trained - this would be fifty years ago, ok? - to pursue negative numbers shown in cash so they could deny the deductions claimed for those checks that were dated the last week of December... The negative cash balance was an audit flag. 8-) :o 8-)


Scenario 1: Suppose the cash method taxpayer wants to pay his electric bill for electric service received in December 2017. If the check was actually mailed before the close of business by the taxpayer on, say, December 31, 2017 (even if not received by and cashed by the recipient until January 2018), would the related expense be deductible by the taxpayer for 2017? (Suppose the amount were material enough for the IRS to issue a 90 day letter, and the taxpayer took it to Tax Court.)

The credit balance in the taxpayer's books as of December 31, 2017 would indeed represent a liability owed to the bank (not "negative cash"), even though the credit side of the entry is physically made to the taxpayer's general ledger "cash" account. And, the book entry arguably is not, strictly speaking, an accrual.

Scenario 2: Suppose a slightly different set of facts, but the same electric bill. The taxpayer goes to the bank on the morning of December 31, obtains a loan from the bank in the form of actual Federal Reserve notes, and then mails that cash to the recipient by the close of the same day. In such a case, the book entry (assuming I combine the borrowing from the bank and the payment of the bill in one entry) would be debit expense and credit liability to bank. And, as before, the recipient would not receive the money until January 2018. Again, this is not an accrual. So, we have just about the same result as described above, in that the balance sheet credit is a liability (not "negative cash").

Are the two transactions distinguishable for Federal income tax purposes? Will the expense be deductible for 2017 under Scenario 1? Will the expense be deductible for 2017 under Scenario 2?
 

#23
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When I become a judge, and this issue is before me, I'll opine that the instructions are an integral part of the forms.


Integral indeed, but authoritative, not so much. Form instructions carry zero weight, just like a Publication. If they are in accordance with some known piece of authoritative guidance (like a Regulation), then they carry weight…but not as form instructions per se, but as recitation of the Regulation.

Here’s a good example. I see the following in the Form 1040, Schedule E (Page 2) instructions:

If you are claiming a deduction for your share of an aggregate loss, attach to your return a computation of the adjusted basis of your corporate stock and of any debt the corporation owes you.

I’ve looked and looked, but I see find this requirement nowhere (except in the above referenced Form Instructions). So, does this aspect of the Form Instruction carry any authoritative weight?

I would also point out that if a particular Tax Form directs you to do something, or directs you to some specific aspect of the form instructions, then the specific aspect of the instructions you have been directed to would constitute part of the “form.” That’s my takeaway from the Merwin case at least:

https://www.casemine.com/judgement/us/5 ... 49347b1965
 

#24
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I thought I learned once that a check mailed by a cash method taxpayer in payment of a deductible expense is properly a deduction on the date it is mailed so long as it subsequently clears in due course. It says that in reg. 1.170A-1(b) as to charitable contributions.
(b) Time of making contribution. Ordinarily, a contribution is made at the time delivery is effected. The unconditional delivery or mailing of a check which subsequently clears in due course will constitute an effective contribution on the date of delivery or mailing.
.I don't see that rule for expenses in general, but isn't it generally applied that way? Is there an added requirement somewhere, that the cash has to be available when you deliver or mail the check?
 

#25
lucyko  
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I would guess from your discussion that your client is an engineering type that dots the I's and crosses the T's . I would further guess that your client is generally compliant and you obtain accurate and quality information from him /her to prepare the tax return .

Why do you even want to engage with him on such a non consequential, petty item that you come to the point of having a "heated debate"and risk relationship issues ?

Like yourself, I have my fair share of engineering type clients and I have learned to accept their individual personalty and quirks This part of our profession . Like yourself, I try to to prepare an accurate return and get paid for it . If he wants an s at the end of fee he gets it without running a new report but changing the label next year .Would he have accepted that compromise after you communicate with him about the non-consequential nature of this and that there is no disclosure rules are being violated ?

You've got to decide whether you want to put up with client idiosyncrasy or move on because next year it's going to be some other non consequential nitpicking issue .
 

#26
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Why do you even want to engage with him on such a non-consequential, petty item that you come to the point of having a "heated debate" and risk relationship issues?


As far as I’m concerned, this 91-year old client should have retired a long time ago. Anyway, I want to engage him to give him some food for thought. This will help him to grow as a person.

From my standpoint, and his, it’s not an inconsequential item. And from the IRS’ standpoint, I can’t say. I’m still trying to figure out the rules pertaining to account labeling…
 

#27
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Jeff -Ohio wrote
" from my standpoint ,and his ,it's not an inconsequential item .And from the IRS standpoint ,I can't say .I'm still trying to figure out the rules pertaining to account labeling ".

We will just have to disagree as professionals on the inconsequential or consequential nature of labeling the expense item "Annual Report Fee " or calling it "Annual Report Fees". I think it important to understand this is merely a title on a statement that supports the other deductions line on the 1120 S tax return . As long as the amount is correct and it's eligible for a full 100 % deduction , which all items in other expenses should be , I personally don't think there is an issue . Your issue instead seems to be with a 91 year old nitpicking client that doesn't seem to understand yours or IRS practice regarding an accurate filing of a 1120 S return .

Regarding the account labeling I am going to give you my opinion . IRS does not care what name or title is placed on the chart of accounts for expense items (they do care about titles for balance sheet items ) .The decisions for titling /labeling expense items is left up to the client and their controller / accountant and varies from firm to firm based on the nature of their business and how they want to present information on an income statement as well as manage the business . I have 8 different S-Corps in my practice and every one of them has a different chart of accounts depending on their business and how they want to identify expenses. They did not obtain approval from IRS to establish any specific expense account . I dare say the labeling and chart of expense accounts for a retail business versus a manufacturer will be quite different .

What IRS is critically interested in is that the underlying chart of accounts and associated expenses flows to the 1120 S in the categories they prescribe .This is because there is significant difference in tax treatment on expense items .Obvious examples are treatment of meals at 50 % ,penalties which are non deductible , depreciation , rents which IRS wants broken out separately, taxes and licenses which can have unique treatment, etc .When you review the 1120 S form you will note that IRS has 13 separate categorizes of expense.The 1120 S instructions provides a definition of each category and tells you generically what specific expense items to include in each category

All major tax software products assist us in converting a company's typical chart of expense items to the categorize IRS wants reported on the 1120 S .I utilize Drake software and they provide 68 commonly used expense categories .I suspect other tax software providers may have slightly more or less . As you enter expense data in the tax software based on clients general ledger there is a conversion table that places it in the proper IRS category for the 1120 S .In this process ,any significant size S-Corp we will end up with a large number of expense items that fall in category "other business expenses". I am very confident that's where your small amount of Annual Report Fees ended up .As mentioned earlier the expense items that go into "other expense category are detailed on a statement attached to the tax return .

So bottom line IRS will accept and have no problem with an expense category labeled "Annual Report Fee " or "Annual Report Fees " .
 

#28
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IRS does not care what name or title is placed on the chart of accounts for expense items (they do care about titles for balance sheet items ) .


What if you have $100k of “advertising,” but you put it in an account titled, “rent expense,” that would okay? IRS wouldn’t care?

They did not obtain approval from IRS to establish any specific expense account .


I concur that pre-approval is not necessary, but there’s gotta be some set of rules at play here, no? What if you have $10k of questionable Travel Expense, but it ends up in an account titled “Employee Benefit Programs?” You don’t think the IRS would care? Wouldn’t the IRS want to see “travel” expenses in an account that has the word “travel” in it?

The 1120 S instructions provides a definition of each category and tells you generically what specific expense items to include in each category


Shouldn’t there me more that just worthless IRS instructions to guide us here with this most fundamental issue?

So bottom line IRS will accept and have no problem with an expense category labeled "Annual Report Fee " or "Annual Report Fees
" .

Will the IRS have a problem with me if my “Repairs” number is kind of high, so I move some of it into “Miscellaneous Expense” and also push some into an account called, “Deductions – Other?”

…and don’t get me started on “Office Expense”…whatever that means…
 

#29
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Two aspects of this come to mind:

1) the client's books and records, which precede the tax return presentation. (I think Nilodop made this same point or a similar point, earlier in this thread).

Are the client's books well organized and meaningful for the business, or haphazard, mis-labeled, mis-aggregated, etc? If the client's books are meaningfully labeled, I see no excuse for not using the same labels on the return. I could even see listing something under "Other expenses" that almost-but-not-exactly matches the pre-printed expense types on the form, although IRS might consider this highly annoying.

2) disclosure of position taken. By labeling something, you are taking a position as to what type of expense it is. (Per Schedule C instructions, you need to "List the type and amount of each expense", so I'm using "type" here in the same sense they do).

Jeff-Ohio wrote:My guy was all worried about some adequate disclosure rules he read about somewhere…

IRS has never defined what it means to "take a position" on a tax return, but every year they publish a rev proc listing the adequate disclosure requirements. (For some reason, I cannot find the 2018 version Revenue Procedure 2018-11 published anywhere on the internet, but here is the one from 2016). According to this rev proc, if you labeled expenses willy-nilly, as in some of the examples given in this thread, and did not disclose the position you were taking as to the type of expenses, you would not be immune to the penalties under Sec 6662(d) and Sec 6694(a).
Jeff-Ohio wrote:on several tax forms, there’s a line item for “Other Deductions.” Can we just lump all (other) expenses in there, and present a single number (after properly completing all the other pre-labeled lines that ask for specific expenses, of course)?

No.

Rev. Proc. 2016–13 wrote:"When the amount of an item is shown on a line that does not have a preprinted description identifying that item (such as on an unnamed line under an “Other Expense” category), the taxpayer must clearly identify the item by including the description on that line. For example, to disclose a bad debt for a sole proprietorship, the words “bad debt” must be written or typed on the line of Schedule C that shows the amount of the bad debt. Also, for Schedule M–3 (Form 1120), Part II, line 25, Other income (loss) items with differences, or Part III, line 37, Other expense/deduction items with differences, the entry must provide descriptive language; for example, “Cost of non-compete agreement deductible not capitalizable,” and the description must be provided on an attachment. Similarly, for other forms, if space limitations on a form do not allow for an adequate description, the description must be continued on an attachment."
 

#30
LW25  
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makbo wrote:[ . . . ] For some reason, I cannot find the 2018 version Revenue Procedure 2018-11 published anywhere on the internet [ . . . ]


For Rev. Proc. 2018-11, see 2018-5 I.R.B. 335 (Jan. 29, 2018), at:

https://www.irs.gov/pub/irs-irbs/irb18-05.pdf
 

#31
lucyko  
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Jeff-Ohio wrote :

"Will the IRS have a problem with me if my repairs number is kinda high so I move some of it into Miscellaneous expense and also push some into account called Deductions other "

Come on Jeff you know the answer to that . What is your motive to intentionally misclassify expense when the 1120 instructions clearly show that repair expense is to be reported on line 9 ? Could it be that the deduction can't be fully supported, or a little thing called DIF, or maybe just an outlier for the year.

Will IRS have a problem ? I would suggest to you that under review or examination and IRS see's a lot of mis classification of expense items then yes their intensity will increase . Why not just follow the instructions for completion of the 1120 form .If you have a large repair expense and it's unusual by normal standards consider a PDF attachment to the return explaining the reason .
 

#32
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Ah! So there *are* some rules we need to follow. Who would have known? (Other than my old client, who apparently wasn’t so crazy after all). Nice work Makbo…

At first, I wondered about the weight of the Rev Proc, but then I see that Reg. Sec. 1.6662-4 says this:
(f) Method of making adequate disclosure.

(1) Disclosure statement. Disclosure is adequate with respect to an item (or group of similar items, such as amounts paid or incurred for supplies by a taxpayer engaged in business) or a position on a return if the disclosure is made on a properly completed form attached to the return or to a qualified amended return (as defined in §1.6664-2(c)(3)) for the taxable year. In the case of an item or position other than one that is contrary to a regulation, disclosure must be made on Form 8275 (Disclosure Statement); in the case of a position contrary to a regulation, disclosure must be made on Form 8275-R (Regulation Disclosure Statement).

(2) Disclosure on return. The Commissioner may by annual revenue procedure (or otherwise) prescribe the circumstances under which disclosure of information on a return (or qualified amended return) in accordance with applicable forms and instructions is adequate. If the revenue procedure does not include an item, disclosure is adequate with respect to that item only if made on a properly completed Form 8275 or 8275-R, as appropriate, attached to the return for the year or to a qualified amended return.


By labeling something, you are taking a position as to what type of expense it is.

Makes total sense, but…the above Reg treats disclosure as separate from taking a position (the actual statute does too). I think the whole “taking a position” thing centers around our ultimate tax treatment (did we deduct it or not) and whether or not we had substantial authority [6662(d)(2)(B)(i)] or a reasonable basis [6662(d)(2)(B)(ii)] for that treatment (collectively, our legal support and rationale). Disclosure is a separate matter. If we do not have substantial authority for our position, we haven’t necessarily lost on the penalty. If we have adequate disclosure AND a reasonable basis, we could still win on the penalty. For example, let’s say we concede the deduction on audit. Assume we have no substantial authority. But IRS agrees we had a reasonable basis. At this point, it comes down to (adequate) disclosure. (But you and I both know that the IRS doesn’t want it to go this far and will argue that we didn’t have a reasonable basis).

As stated in the Rev Proc Makbo cited:

.03 In the case of an item not attributable to a tax shelter, if the taxpayer has a reasonable basis for the tax treatment of the item, the amount of the understatement is reduced by the portion of the understatement attributable to the item with respect to which the relevant facts affecting the item’s tax treatment are adequately disclosed in the return or in a statement attached to the return. Section 6662(d)(2)(B)(ii).

That agrees with the statute (Sec 6662):

(ii)any item if—
(I) the relevant facts affecting the item’s tax treatment are adequately disclosed in the return or in a statement attached to the return, and
(II) there is a reasonable basis for the tax treatment of such item by the taxpayer.

However, one thing that is unclear is the necessity of attaching a statement. The statute talks about adequately disclosing the relevant facts…”in the return” or “in a statement attached to the return.” The Rev Proc says the same thing. (My hang-up is that I don’t see how one could disclose “relevant facts” in something other than an attachment. You can’t do that by just inserting a number on a line). But the Rev Proc also says:


.01 General (1) Additional disclosure of facts relevant to, or positions taken with respect to, issues involving any of the items set forth below is unnecessary for purposes of reducing any understatement of income tax under section 6662(d) (except as otherwise provided in section 4.02(3) concerning Schedules M–1 and M–3), provided that the forms and attachments are completed in a clear manner and in accordance with their instructions.


Wow! It seems like the IRS is making a very pro-taxpayer concession here. The IRS is completely disregarding the written words in the Code. In the Rev Proc, we are told to properly use the pre-printed lines and use clear “labels” for things like “other deductions”…and we’re good to go (at least on the disclosure issue). In summary, if we have some questionable travel deductions and we throw them into some category that doesn’t include the word “travel” in it, we have a penalty problem, IMO…even if we have a reasonable basis for claiming that deduction.
 

#33
Nilodop  
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I may have posted this story on TA, but anyway, I once had a client whose CEO was adamant that the first line in the company income statement was incorrectly labeled. It read "Sales". He wanted "Shipments". Sales happened way earlier, when they took an order.
 

#34
juro  
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hi
are filed returns required to use all caps or all capital letters?
 

#35
Nilodop  
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If you do that, you'd be capitaizing expenses.
 

#36
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IRS rules may not permit capitalizing liabilities
 

#37
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My haberdasher client uses all caps for his inventory account
~Captcook
 

#38
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Would capitalizing constitute a change in method type?
 

#39
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HenryDavid wrote:Would capitalizing constitute a change in method type?


Only if you make the change methodically
~Captcook
 

#40
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If you do that, you'd be capitaizing expenses

But what if there is only one Expense account on the P&L?
Would capitalizing constitute a change in method type?

No, but we do have a Duty of Consistency.

A corollary question is if we don’t move to all caps for the current year, but we simply change the Font, is that a problem?
 

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