Checklist for preparing and reviewing business tax returns.

• Author: Rigby, Edward P.
• Position: Illustration

The following checklist focuses on tax planning issues associated with business tax returns. The checklist can serve as a supplement to the AICPA's Tax Practice Guides and Checklists, as it provides only general guidance. It can also serve as a training guide for less experienced professionals, enabling them to identify key tax issues.

Applicable Nonapplicable Income Issues 1. Tax accounting. Evaluate whether a client's use of the cash method of accounting is appropriate, In light of recent IRS examinations, consider Regs. Sec. 1.446-1(c) (2)(i), which requires the accrual method of accounting for purchases and sales in any case in which inventory is necessary; see also Regs. Sec. 1.471-1. Caution: The IRS often challenges traditional service businesses that also sell merchandise. It issued Rev. Proc. 98-60, which states that a taxpayer may obtain automatic consent to change accounting methods. This is the current statement of procedures. Rev. Proc. 71-21 also provides deferral opportunities for certain advance payments for services. -- -- 2. Inventory. Consider recent court decisions when advising a client on the effects of a bargain purchase of inventory on a client's LIFO inventory pools. Hamilton Industries, Inc., 97 TC 120 (1991), Kohler Co., 124 F3d 1451 (Fed. Cir. 1997) and LaCrosse Footware, Inc., Ct. Fed. Cl. (1998), focused attention on the issue of so-called bargain purchases of inventory. Generally, the IRS treats bargain purchase items as a separate LIFO pool. -- -- 3. Sec. 263A, uniform capitalization rules. Consider application of the UNICAP rules. Rev. Proc. 98-60 provides accounting method change procedures. -- -- 4. Capital gains versus ordinary income. Address the choice of entity, with a long-term view of when a business is sold. Choice of entity is particularly important for passthrough entities, ensuring that a taxpayer is maximizing capital gains treatment. For example, using an S corporation or partnership (including a limited liability company (LLC)) instead of a C corporation allows gains associated with intangible assets (such as goodwill) to receive long-term capital gains treatment at the individual-owner level. -- -- 5. Deferral opportunities. Be on guard for opportunities to discuss deferral provisions, such as (1) like-kind exchange rules, if a taxpayer plans to sell business property, (2) sale of qualified small business stock and (3) rollovers associated with sales of publicly traded securities. A deferral...