[Anonymous]

Sorry to keep spamming this site, but I really need to make sure I get all my detailed facts straight so I can pass this test. Please see these two questions…

Gleim MCQ…

Alayna is a voice and singing coach. She is a calendar-year taxpayer using the accrual method of accounting. On

November 2, 2010, she received $3,200 for a 2-year contract for 64 one-hour voice and singing lessons beginning on

that date. The contract provided that Alayna give eight lessons in 2010 and 48 lessons in 2011, with the remaining

lessons to be given in 2012. What is the amount that Alayna should report on her 2011 return?

A. $0

B. $2,800

C. $3,200

D. $2,400

Answer (B) is correct. Amounts that are paid for future services are required to be included in the year of

receipt. This rule applies whether the taxpayer is on the cash or accrual method of accounting. There is an

exception that allows accrual taxpayers a limited one-year deferral of income for services performed in

subsequent years. Payment for the 8 lessons in 2010 is included in income on the 2010 return. The remaining

payment of $2,800 ($3,200 – $400) may be deferred to 2011.

Gleim Simulation….

An accrual-basis corporation received cash on December 28, Year 1, for services that will be performed in Year 2. Included or Excluded in Year 1?

Answer- Included. Amounts that are actually or constructively received must be included in gross income for the year of receipt if that taxpayer has unrestricted claims to that amount.

In the MCQ, it deferred the income to the next year since it was allowed a 1-year deferral for those services that are to be performed later on. But on the Simulation question, it didn’t defer the income to Year 2. It said that it should be included in Year 1. Shouldn’t it have been allowed a 1-year deferral? If not, is it because Corporations don’t get the 1-year deferral, but individual taxpayers do?? I didn’t see that difference specified anywhere in my book.

Again, I thank you all for the help and I’m sorry to be such a bother.

[Justinnnn]

My advice is that Gleim simulation is wrong. It is probably a 1990s simulation that is outdated by an early 2000's Rev. Proc I think it is 2002-34 (I might be off a year here).

Truly, the deferral period depends on the subject of prepaid income. In the case of prepaid income related to purely manufactured products, withi de minis services, tax follows GAAP in the recognition of deferred revenue.

In the case of services, like your examples, the 2000's rev proc was established – the 1-year deferral period applies. I believe the MCQ you posted is correctly following the tax laws.

REG 80 2/7/11
FAR 91 10/8/11
AUD 97 11/22/11
BEC 96 2/4/12

CPA 3/15/13

[Anonymous]

I see. Thanks! And just so you know, I ended up getting that Gleim Sim wrong. I put in Excluded because I remembered that deferral rule. But then when I completed the Sim, I was told it was wrong and was like, “What??” and was ready to jump out the window.

Anyways, thanks again! 🙂

[Justinnnn]

Rev Proc 2004-34

https://www.irs.gov/irb/2004-22_IRB/ar16.html

Examples from the rev proc (look familiar:)??? )

Example 1. On November 1, 2004, A, in the business of giving dancing lessons, receives an advance payment for a 1-year contract commencing on that date and providing for up to 48 individual, 1-hour lessons. A provides eight lessons in 2004 and another 35 lessons in 2005. In its applicable financial statement, A recognizes of the payment in revenues for 2004, and of the payment in revenues for 2005. A uses the Deferral Method. For federal income tax purposes, A must include of the payment in gross income for 2004, and the remaining of the payment in gross income for 2005.

Example 2. Assume the same facts as in Example 1, except that the advance payment is received for a 2-year contract under which up to 96 lessons are provided. A provides eight lessons in 2004, 48 lessons in 2005, and 40 lessons in 2006. In its applicable financial statement, A recognizes of the payment in revenues for 2004, of the payment in revenues for 2005, and of the payment in gross revenues for 2006. For federal income tax purposes, A must include of the payment in gross income for 2004, and the remaining of the payment in gross income for 2005.

REG 80 2/7/11
FAR 91 10/8/11
AUD 97 11/22/11
BEC 96 2/4/12

CPA 3/15/13

[jdj017400]

This is literally the first time I have ever heard of this one-year deferral exception. I was under the impressions for individuals that prepaid income is always included in the year it is received.

Becker has NEVER mentioned this rule in the book, mcqs, or simulations…

Thanks for posting this.

BEC - 80 (11/30/2010), Lost Credit - Retake 11/30/2012, 80 (FINISHED!)
AUD - 71 (05/31/2011), 79 (08/28/2011)
REG - 70 (11/30/2011), 87 (02/09/2012)
FAR - 61 (5/31/2012), 80 (08/31/2012)

[thechamp26]

@jdj017400

Be careful because most individuals use the cash method

[jdj017400]

@thechamp

Thanks, good point! Still wish Becker would at least mention this for accrual based taxpayers…

BEC - 80 (11/30/2010), Lost Credit - Retake 11/30/2012, 80 (FINISHED!)
AUD - 71 (05/31/2011), 79 (08/28/2011)
REG - 70 (11/30/2011), 87 (02/09/2012)
FAR - 61 (5/31/2012), 80 (08/31/2012)

[thechamp26]

If you look at the big picture, though… Becker can't go through every part of the tax code. The plus side of them not including everything is you can focus more on the overall picture and have a better understanding of taxation as a whole opposed to getting tied down on items you might not ever see.

Plus… if you get a multiple choice question on it, you won't lose much by not knowing it. If you got a sim on it, you can at least look up the treatment in the research.

Also, you have to elect to defer revenue I believe. It's not automatic. Maybe it's more beneficial to pick up the income in the year the advance payment was received? What if tax rates go up next year? There are other scenarios as well that I can think of where maybe a company wouldn't elect to defer revenue.

[Justinnnn]

@thechamp

Good point about the cash method.

However, the deferral method for an accrual-based taxpayer is technically automatic if you establish the method at the start of business, and possibly include a statement with your tax return electing pursuant to rev proc 2004-34.

After two years of tax filings,the method you choose for deferred revenue is an established method. If your business would like to change from an established full inclusion method (recognize income when cash is received) to a deferral method, Form 3115 would have to be filled to apply for a change in method. When this is filed, the taxpayer typically recognizes a “481(a)” adjustment to adjust the taxable income recognized to-date as if the method was filed in all years. An unfavorable 481(a) can be recognized over 3-4 years (can't remember specifically), a favorable adjustment is recognized in the year of application.

REG 80 2/7/11
FAR 91 10/8/11
AUD 97 11/22/11
BEC 96 2/4/12

CPA 3/15/13

[thechamp26]

Right so businesses that were around before 2004 are on the full inclusion method so wouldn't they have to elect the deferral method by filing form 3115?

[Justinnnn]

@champ, I think i misspoke about the 2004 thing…I assumed Gleim had that answer because the rules were different then. According to the Rev proc, the deferral rule has been around since 1970s. Sorry for the confusion, although i have no idea why Gleim would have a different answer on their sim at this point….. see below:

03 Rev. Proc. 71-21, 1971-2 C.B. 549, was published to implement an administrative decision of the Commissioner in the exercise of his discretion under § 446 to allow accrual method taxpayers in certain specified and limited circumstances to defer the inclusion in gross income for federal income tax purposes of payments received (or amounts due and payable) in one taxable year for services to be performed by the end of the next succeeding taxable year.

REG 80 2/7/11
FAR 91 10/8/11
AUD 97 11/22/11
BEC 96 2/4/12

CPA 3/15/13

[thechamp26]

The difference is the Rev. Proc. 2004-34 allows for the deferral of income for one year even if the services aren't performed by the end of the next succeeding tax year.

[Justinnnn]

Yes champ, which is wierd because the Gleim sim should qualify under both the old and new rule.

REG 80 2/7/11
FAR 91 10/8/11
AUD 97 11/22/11
BEC 96 2/4/12

CPA 3/15/13

[Author]

Replies