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Conducting the Tax Preparations

John’s decision

John can decide to complete the financial statements under the United States Code 446 regarding special rules on accounting methods (Burnham, 2002). However, the application of this code and set of accounting methods require permission from the Internal Revenue Service (IRS). Alternatively, John may request Sue to provide additional information on expenses and receipts to complete the financial statements. Since Sue does not have the required documentation, John will apply the exceptional rule of cash-based and accrual-based permissible methods of accounting. In addition, John can complete the financial reports by subjecting the available information under a calendar tax year.

Apparently, a calendar tax year is effective when completing financial reports of a business that does not keep records (Burnham, 2002). Moreover, Sue’s lack of information implies that she does not subscribe to an annual accounting period. In this context, John must advise Sue to get IRS approval to change from calendar to fiscal tax year. This approval requires filing Form 1128 which is regarded as the Application to Adopt Form and presenting the same to IRS.

John’s role

Cash-based accounting method

In this context, John will request Sue to provide all information that is required from a sole proprietor. In this context, information about the business income is presented concerning all items received during the tax year (Zuckerman & Wolf, 2004). In regard, the income includes property and services received, as well as the respective market value within the tax period.

The inclusion of the constructive receipt in this accounting method entails records of the amount credited to Sue’s account, irrespective of the payments received by an agent.

John must advise Sue not to withhold checks from one year to another. However, this entails recording the checks and including the same as income irrespective of whether valid or post-dated (Zuckerman & Wolf, 2004).

Under the cash-based accounting method, the business expenses will be deducted within the tax year (Zuckerman & Wolf, 2004). However, Sue has the option of deducting expenses paid in advance as part of trying to balance the financial reports.

The accrual-based accounting

From this accounting procedure, Sue must provide a report on income and expense deductions in the year incurred. Under this method, the general principle is to include gross income within the predetermined tax year (Zuckerman & Wolf, 2004). However, this must be considered with reasonable accuracy since the information provided involves estimations.

In the case of estimated income, a difference between the exact and estimated gross income must be determined (Zuckerman & Wolf, 2004). Sue might not provide information if there was a special change in the payment schedule for services. In this context, Sue must prove that the business was under contract to provide services where the basic rates changed within the period. In addition, John can complete the financial reports if Sue received advance payments. However, this is possible if the services are to be rendered in a later tax year. In this case, John will file the advance payment as income for the immediate tax year. However, John can balance payments and receipts by excluding the advance payment. In this context, the services are to be rendered by the end of the following year.

In conclusion, the accrual-based method of accounting allows expenses to be deducted if all operations determine a fact of liability or economic performance is evidenced (Zuckerman & Wolf, 2004). In this context, deductions from expenses must prove the occurrence of economic performance. However, lack of economic performance by office supplies, human resources, and facilities forms recurring expenses that are deductible as expenses.

References

Burnham, W. (2002). Introduction to the law and legal system of the United States. Eagan, MN: West Group.

Zuckerman, J & Wolf, W. (2004). The business tax return handbook. Chicago, IL: American Bar Association.

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ApeGrade. 2022. "Conducting the Tax Preparations." April 10, 2022. https://apegrade.com/conducting-the-tax-preparations/.

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