In basic, taxable money is essential to be computed under the process of accounting used by a taxpayer in sustaining its textbooks, except as usually necessary by the Inner Profits Code (IRC or Code) or Treasury rules (IRC §446(a)). As a result, a taxpayer that constantly applies usually approved accounting ideas (GAAP) in computing its revenue from a small business for needs of its economic statements ordinarily will use that very same approach in computing its taxable revenue. If, having said that, that process “does not evidently reflect profits,” the computation of taxable income ought to be designed below such technique as, in the opinion of the Commissioner, does plainly mirror income (IRC §446(b)).
Continuing Lifetime Communities Thousand Oaks, LLC v. Commissioner (TC Memo 2022-31) considers the scope of the electricity of the Commissioner to impose a different accounting system with respect to upfront service fees not included in cash flow at the time of payment. In this situation it was undisputed that the petitioner (“Continuing Daily life,” a limited liability firm labeled as a partnership for tax purposes) made use of a method permitted by GAAP, but the IRS considered that the technique did not evidently mirror revenue.