- For 2025, which of the following is correct regarding the LIFO inventory method?
Answer: A LIFO election is made by filing Form 970 with the taxpayer's timely filed income tax return (including extensions) for the first taxable year the method is used, and the LIFO inventory is then valued at cost.
IRC § 472 and Treas. Reg. § 1.472-3. A LIFO election is made by filing Form 970 with the timely filed return for the first taxable year for which LIFO is used, and LIFO inventory is valued at cost; lower of cost or market is not available for LIFO goods. Choice B states this rule. Choice A is wrong because disclosure does not permit lower of cost or market with LIFO. Choice C wrongly requires a prior application. Choice D wrongly permits a market write-down for LIFO inventory.
- For purposes of the §448(c) gross receipts test, which of the following is correct?
Answer: Meridian is not eligible for 2025 because its average annual gross receipts for 2022–2024 are $31,100,000.
IRC § 448(c). Gross receipts for the test are not reduced by cost of goods sold, are reduced by returns and allowances, and include interest income. Meridian's 2022, 2023, and 2024 gross receipts are $30,900,000, $31,200,000, and $31,200,000, for a three-year average of $31,100,000, so it does not meet the $31,000,000 threshold. Choice C is correct. Choice A omits interest income. Choice B fails to reduce gross receipts by returns and allowances. Choice D applies the threshold to a single year instead of the three-year average.
- For 2025, which of the following is correct regarding the small business taxpayer exceptions that permit certain C corporations to use the cash method and to treat inventory as non-incidental materials and supplies?
Answer: A C corporation that is not a tax shelter and whose average annual gross receipts for the three preceding tax years do not exceed $31,000,000 may use the cash method and may treat inventory as non-incidental materials and supplies under the §471(c) exception.
IRC §§ 448(c) and 471(c). A C corporation that is not a tax shelter may use the cash method if its average annual gross receipts for the three preceding tax years do not exceed $31,000,000, and a qualifying small business taxpayer may also treat inventory as non-incidental materials and supplies. Choice A states this rule. Choice B misstates the look-back: the test is based on prior years, not current-year gross receipts. Choice C misstates the unit of measurement: the test is applied to the taxpayer's aggregate gross receipts, not separately to each trade or business. Choice D misstates the inventory exception: a qualifying taxpayer may use the §471(c) treatment even when its inventory is not incidental.
- What amount should Priscilla report on Schedule C for 2025 as net sales (gross receipts less returns and allowances)?
Answer: $173,000
IRC § 61; Instructions for Schedule C (Form 1040); Pub. 334. Net sales on Schedule C are gross receipts less returns and allowances. Sales tax that state law imposes on the buyer, and that the seller collects as the state's agent and remits, may be excluded from gross receipts; only a tax imposed on the seller is included in gross receipts and then deducted. The proceeds from selling business-use display shelving are not gross receipts from sales; that sale is reported on Form 4797. Net sales are $180,000 − $7,000 = $173,000. Choice A is correct. Choice B ($176,500) is wrong because it adds the $3,500 shelving proceeds, which belong on Form 4797. Choice C ($187,400) is wrong because it includes the $14,400 of sales tax imposed on buyers, which is excluded from gross receipts. Choice D ($190,900) is wrong because it includes both the sales tax and the shelving proceeds.
- What amount should Hartwell report as cost of goods sold for 2025?
Answer: $523,000
IRC §471 and Treas. Reg. §1.471-1 require a taxpayer using inventories to include in ending inventory all merchandise to which it holds title, including goods out on consignment; goods held on consignment from another belong to the consignor and are excluded from the consignee's inventory. Under the periodic method, cost of goods sold equals beginning inventory plus purchases minus purchase discounts plus freight-in minus ending inventory.
Computation: goods available for sale = $90,000 + $510,000 - $10,000 + $25,000 = $615,000. Ending inventory = $74,000 physical count + $18,000 of consigned-out goods = $92,000. The $22,000 of consigned-in goods are not Hartwell's inventory. Cost of goods sold = $615,000 - $92,000 = $523,000.
Choice A ($498,000) omits the $25,000 of freight-in from goods available for sale; freight-in is part of the cost of merchandise purchased and must be capitalized into inventory. Choice B ($501,000) adds the $22,000 of consigned-in goods to ending inventory; title to those goods remains with the manufacturer, so they belong in the manufacturer's inventory, not Hartwell's. Choice D ($541,000) leaves the $18,000 of consigned-out goods out of ending inventory; merchandise shipped on consignment remains the consignor's inventory until sold.
- What is the amount of Bennett's 2025 gross receipts for purposes of the §448(c) gross receipts test?
Answer: $28,350,000
IRC § 448(c) and Temp. Treas. Reg. § 1.448-1T(f)(2)(iv)(A). Gross receipts for the gross receipts test include total sales net of returns and allowances, and all amounts received for services and from investments, including interest, dividends, and rents. Gross receipts from the sale of capital assets and property described in § 1231 or § 1221(a)(2) are taken into account only net of the property's adjusted basis. Borrowed amounts are not receipts derived from the taxpayer's activities and are excluded.
Computation: sales net of returns and allowances, $27,400,000 - $200,000 = $27,200,000; land sold, $1,500,000 - $900,000 adjusted basis = $600,000; interest, $80,000; dividends, $150,000; rents, $320,000; bank loan proceeds, excluded. Total = $27,200,000 + $600,000 + $80,000 + $150,000 + $320,000 = $28,350,000, which is Choice B. This is Bennett's 2025 gross receipts for the § 448(c) test; the test itself generally uses average annual gross receipts for the 3-taxable-year period ending with the prior tax year.
Choice A ($27,750,000) omits the land sale entirely; the sale of a capital asset is included, net of adjusted basis. Choice C ($28,750,000) includes the $400,000 bank loan; loan proceeds are not gross receipts. Choice D ($29,250,000) uses the $1,500,000 gross proceeds from the land sale instead of reducing them by the $900,000 adjusted basis.
- Which of the following costs is required to be capitalized into inventory under §263A?
Answer: Salaries of the purchasing department
IRC §263A(a)(2); Treas. Reg. §1.263A-1. For a producer required to capitalize costs, indirect costs that benefit production—including purchasing costs—must be capitalized into inventory. Selling, marketing, advertising, and distribution costs are not §263A costs and remain currently deductible. Choice A is therefore correct. Choices B, C, and D fall into the non-capitalized selling and distribution categories.
- What amount should Marisol assign to this item in ending inventory?
Answer: $80, because for tax purposes market is the item's current replacement cost (bid price).
Treas. Reg. § 1.471-4(a). For tax purposes, market under the lower of cost or market method is the current bid price for the item in the volume usually purchased, that is, its replacement cost. The regulation has no net-realizable-value ceiling or floor; those are financial accounting rules. The exception for goods offered for sale below the current bid price does not apply, because she offers the item at $150, well above its $80 replacement cost. Market is $80, lower than the $120 cost, so the item is valued at $80. Choice A is correct. Choice B applies the financial accounting floor of $150 - $10 - $30 = $110. Choice C wrongly bars a write-down of goods still on hand; lower of cost or market exists to allow one. Choice D uses net realizable value, $150 - $10 = $140, as market.
- Which of the following is correct regarding Beacon's ability to make this change for 2025?
Answer: Beacon cannot make the change because its average annual gross receipts for 2022 through 2024 exceed $31,000,000.
IRC §§448(c)(1) and 471(c). For 2025, the gross-receipts test is based on the average annual gross receipts for the three preceding tax years, not the current year. Beacon's 2022–2024 average is $32,166,667, which exceeds $31,000,000, so it is not a small business taxpayer and cannot use the cash method or the §471(c) inventory exception. Choice A uses the wrong lookback year. Choice B confuses the method-change procedure with eligibility. Choice D is false because C corporations that meet the gross-receipts test may use the cash method.
- Which of the following correctly describes the items that must be included in Petra's ending inventory for 2025?
Answer: The consigned kits, the FOB shipping point kits, and the FOB destination kits, because title to each group is still vested in Petra.
Treas. Reg. §1.471-1. Inventory includes merchandise in which title is vested in the taxpayer. Consigned goods remain the consignor's property until sold, so Petra includes them. Under FOB shipping point, title to the incoming kits passed to Petra when they were delivered to the carrier on December 28. Under FOB destination, title to the outgoing kits does not pass until delivery, so Petra still owns them in transit. Choice D is correct; Choice A omits the outgoing FOB destination kits, Choice B misstates the FOB shipping point rule, and Choice C treats the consignee retailers as owners of consigned goods.
- Which of the following is correct regarding Clover's proposed LIFO election?
Answer: The election is invalid because using FIFO in the financial statements it issues to shareholders violates the LIFO conformity requirement.
IRC §472(c) imposes the LIFO conformity requirement: a taxpayer using LIFO for tax must also use LIFO in ascertaining income, profit, or loss for reports or statements to shareholders and creditors. Clover's attachment of Form 970 and use of LIFO on its 2025 return are not enough; the FIFO financial statements issued to shareholders for 2025 violate the conformity requirement, so the election is invalid, and Choice C is correct. Choice A is wrong because, although tax and financial accounting generally may differ, the LIFO conformity requirement is a specific exception, and attaching Form 970 does not cure the failure. Choice B is wrong because no later Form 3115 filing can conform the prior financial statements; the conformity requirement applies for the year of election. Choice D is wrong because the law imposes no two-year prior-use requirement for financial statements.
- What is Summit's average annual gross receipts for purposes of the §448(c) gross receipts test for 2025?
Answer: $26,000,000
IRC §448(c)(1) and Temp. Treas. Reg. §1.448-1T(f)(2) provide that the gross receipts test for a taxable year is based on average annual gross receipts for the 3-tax-year period ending with the taxable year that precedes the current year. A taxpayer not in existence for the entire 3-tax-year period computes the average over the period it was in existence.
For Summit's 2025 test, the lookback period is 2022 through 2024. Summit existed only in 2023 and 2024, so its average annual gross receipts = ($18,000,000 + $34,000,000) / 2 = $26,000,000. Because $26,000,000 does not exceed the 2025 threshold of $31,000,000, Summit meets the test for 2025 even though its 2025 gross receipts are $43,000,000.
Choice A ($17,333,333) treats the pre-existence year 2022 as a zero year in the 3-year average; years before the taxpayer came into existence are not counted, and the average is computed over the two years of existence. Choice C ($31,666,667) includes 2025's $43,000,000 in the 3-year average; the test for 2025 looks back to the period ending with 2024, not the current year. Choice D ($43,000,000) substitutes 2025 gross receipts for the average; the test compares the average annual gross receipts with the threshold, not current-year receipts.
- What is Riley's ending inventory at cost for 2025?
Answer: $25,900
Treas. Reg. §1.471-8. Under the conventional retail method, the cost complement is cost of goods available for sale divided by retail value of goods available for sale, including net markups but excluding net markdowns: ($18,000 + $50,000 + $2,000) ÷ ($25,000 + $70,000 + $5,000) = 70%. Ending inventory at retail is $25,000 + $70,000 + $5,000 − $3,000 − $60,000 = $37,000, so ending inventory at cost is 70% × $37,000 = $25,900. Choice B includes net markdowns in the cost-complement denominator (the cost-retail treatment rather than the conventional LCM treatment): $70,000 ÷ $97,000 ≈ 72.16%, × $37,000 = $26,701. Choice C omits net markdowns when computing ending inventory at retail ($40,000 × 70% = $28,000). Choice D adds net markdowns to ending inventory at retail ($43,000 × 70% = $30,100).
- What amount should Atlas report as cost of goods sold for 2025?
Answer: $390,000
Treas. Reg. § 1.471-3(b). Cost of purchased merchandise is invoice price reduced by trade discounts, plus freight-in and other acquisition costs, and purchases are reduced by purchase returns. Net purchases are $420,000 - $20,000 - $10,000 + $15,000 = $405,000. Cost of goods sold is $80,000 + $405,000 - $95,000 = $390,000. Choice C is correct. Choice A omits the trade discount. Choice B omits the purchase returns. Choice D treats freight-in as a current deduction rather than adding it to inventory cost.
- Which of the following costs is currently deductible rather than capitalized into inventory?
Answer: Advertising costs for newspaper, internet, and direct-mail promotions of the corporation's merchandise.
IRC § 263A. For a reseller subject to uniform capitalization, purchasing, handling, and off-site storage costs are capitalized into inventory, while selling, advertising, marketing, and distribution costs are not. Choice D is therefore the currently deductible cost. Choice A is a handling cost, Choice B is a storage cost, and Choice C is a purchasing cost, all of which are capitalizable.
