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12-Month Rule
Regulation that allows prepaid business expenses to be currently deducted when the contract does not extend beyond 12 months and the contract period does not extend beyond the end of the tax year following the year of the payment.
Accounting Method
The procedure for determining the taxable year in which a business recognizes a particular item of income or deduction thereby dictating the timing of when a taxpayer reports income and deductions.
Accounting Period
A fixed period in which a business reports income and deductions, generally referred to as a tax year.
all-events test
Requires that income or expenses are recognized when:
1. All events have occurred that determine or fix the right to receive the income or liability to make the payments.
2. The amount of the income or expense can be determined with reasonable accuracy.
Allowance Method
Bad debt expense is based on an estimate of the amount of the bad debts in the accounts receivable at year-end.
arm's length amount
price in transaction among unrelated taxpayers, where each transacting party negotiates for his or her own benefit.
Casualty Losses
A loss arising from a sudden, unexpected, or unusual event such as a "fire, storm, or shipwreck" or loss from theft.
Deferral Method
Recognizes income from advance payments for goods by the earlier of:
1. When the business would recognize income for tax purposes if it had not received the advance payment
or
2. When it recognizes the income for financial reporting purposes.
Direct Write-off Method
1. Required method for deducting bad debt for tax purposes.
2. Under this method, businesses deduct bad debt only when the debt becomes wholly or partially worthless.
Domestic Production Activities Deduction(DPAD)
A deduction for businesses that manufacture goods in the United States.
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