Music Trade Review

Music Trade Review -- © mbsi.org, arcade-museum.com -- digitized with support from namm.org
FEBRUARY 12,
1921
THE MUSIC TRADE REVIEW
A Digest of the Income Tax Laws
Music Merchants Will Find the Following Article Full of Authoritative Information Regarding the Manner in Which
Income Taxes Should Be Figured for 1921—Items Which Must Be Reported, Deductions Allowed
and the Method of Filing Returns Outlined by the Bureau of Internal Revenue
The Bureau of Internal Revenue has prepared
an article on the income tax laws and regula-
tions for 1920, written especially for the mer-
chant, manufacturer and business man. It con-
tains important rulings recently adopted by the
Bureau and is herewith reproduced for the bene-
fit of members of the trade:
Recent Treasury decisions affect materially re-
turns of income taxes which will be made by
business men for the year 1920. Among the
more important is the decision in relation to
valuations of inventories, in accordance with
which a taxpayer may, regardless of his past
practice, adopt the basis of "cost or market,
whichever is lower," for his 1920 inventory. In
his return the taxpayer must state that it rep-
resents a change from his former basis. There-
after changes can be made only by permission
of the Commissioner of Internal Revenue.
The Definition of "Cost"
In the case of a merchant "cost" means the
invoice price less trade or other discounts ex-
cepting strictly cash discounts approximating a
fair rate of interest, which may be deducted
or not at the option of the taxpayer, providing
a consistent course is followed. To the net in-
voice price should be added the cost of trans-
portation and other necessary charges incurred
in acquiring possession of the goods.
In the case of a manufacturer "cost" means
the cost of raw materials and supplies, expendi-
tures for labor and indirect costs incident to
production, including a reasonable proportion
of management expenses, but not including any
cost of selling or securing return on capital.
"Market" means the current bid price prevail-
ing at the date of the inventory for the par-
ticular merchandise. The burden of proof as
to the correctness of the price rests upon the
taxpayer in each case. Where no open market
quotations are available, the taxpayer must use
such evidence of a fair market price at the dates
nearest the inventory as may be available, such
as specific transactions, or compensation paid
for cancellation of contracts or purchase com-
mitments. Where, because of abnormal condi-
tions, the taxpayer has regularly sold such mer-
chandise at prices lower than the market bid
price, the inventory may be valued at such prices.
The correctness of the prices will be determined
by reference to the actual sales of the taxpayer
for a reasonable period before and after the
date of inventory. Prices which vary materially
from the actual prices so ascertained will not be
accepted as reflecting the market. In such in-
stances, the penalties prescribed for filing false
and fraudulent returns—a fine of not more than
$10,000 or one year's imprisonment or both, to-
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gether with the cost of prosecution and an added
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asserted.
The value of each item in the inventory may
be measured by cost or market, whichever is
lower. An entire stock may now be inventoried
at cost and also at market price, and the lower
of the two inventories used. Inventories on
whatever basis taken will be subject to investi-
gation by the Commissioner of Internal Revenue,
and the taxpayer must satisfy the commissioner
of the correctness of the prices adopted. He
must be prepared to show both the cost and the
market price of each article included in the in-
ventory.
Three Classes of Business Enterprises
Business enterprises, for the purposes of the
income tax, may be divided into three classes:
Those engaged in making, those engaged in pro-
ducing, and those engaged in trading. To these
may be added another class which neither pro-
duce, make nor trade, but render what may be
designated as business services, such as trans-
portation, storage, livery and garage service, in
which case the gross income would be the total
amount received or earned.
In mercantile accounting the gross profit for
a given period is obtained from a group of ac-
counts known as trading accounts, consisting
of inventory, purchases, sales, freight, returns,
and allowances, and in certain cases discount
and freight charges outward. Discount should
be charged or credited to the distribution ac-
counts of the business. Freight outward should
be considered a selling expense.
There are three elements which enter into the
cost of a manufactured product, cost of material,
cost of labor and manufacturing expense, some-
times called overhead. The first and second ele-
ments go to make up the prime cost of manu-
facturing. Gross income in such business means
total sales less the prime cost of goods sold.
Treasury regulations provide that in determin-
ing gross income subtractions should not be
made for depreciation, depletion, selling ex-
penses, or losses, or for items not ordinarily
used in computing the cost of goods sold.
Deduction of Business Expenses
The Revenue Act provides for the deduction
of business expenses. Among the items to be
treated as business expenses are material, labor,
supplies and repairs in the case of a manufac-
turer, while a merchant would include his pur-
chase of goods bought for resale. In either case
the amount to be taken as a deduction for the
year 1920 should be determined by taking into
consideration the inventory at the beginning and
end of the year. Other items that may be in-
cluded as business expenses are reasonable com-
pensation for the services of officials and em-
ployes, advertising, and other selling expenses,
together with insurance premiums against fire,
storm, theft, accident or other similar losses,
and rental for the use of business property.
A taxpayer may deduct the necessary expenses
paid in carrying on his business from his gross
income from whatever source In computing
net income upon which the tax is assessed, a
deduction for business expense or a disburse-
ment or charge must have certain qualities in
order to be allowed. It must relate to a trade,
business, profession, or vocation, "carried on" by
the taxpayer in which he has invested time and
money for the purpose of a livelihood or profit.
A business is being carried on by its owner, even
though all its activities may be conducted by
employes.
The deduction must be a "business expense"
and not an ''investment of capital." Amounts
expended for the erection of new buildings, in-
stallation of machinery and the purchase of
tools or implements of permanent value do not
constitute business expenses, being merely a
change in the form of capital and not a reduc-
tion of wealth. Expenditure for property which
is used up in the course of the year may be de-
ducted as a business expense.
Traveling Expenses Deductible
Many representatives of business houses will
be benefited by a recent Treasury decision rela-
tive to traveling expenses. Reasonable and
necessary traveling expenses include railroad
fares, meals and lodging. A traveling man,
working on a salary without reimbursement for
traveling expenses, or employed on a commis-
sion basis with no expense allowance, may de-
duct his expenses for railroad fare, and also his
expenses for meals and lodging in an amount in
excess of the ordinary cost for such living ex-
pense when at home.
If he receives a salary and is repaid his actual
traveling expenses, he must include as gross
income an amount equal to the ordinary ex-
pense for meals and lodging when at home, as
such amount is held to be additional compensa-
tion to the taxpayer.
Deductions for Losses Explained
Numerous errors relative to claims for de-
ductions for losses have been discovered in re-
turns of prior years. To be allowed, deductions
for losses must be confined to the following
classes: Losses sustained in trade or business;
losses sustained in transactions entered into for
profit, though not connected with a trade or
business; losses sustained of property not con-
nected with trade or business if arising from
fires, shipwreck, storms, or other casualty, or
from theft. To the extent any of the above
losses are compensated for by insurance or
otherwise, they are not deductible.
A common loss of a person engaged in busi-
ness is the destruction or theft of merchandise.
A merchant who uses inventories to ascertain
his profit should not make on his books entries
for any of his stock in trade that is destroyed or
stolen, for the reason that such loss will be re-
flected in his closing inventory. If his books
are kept on a cash basis which properly shows
his correct profits, he may deduct specifically the
amount of his loss. In either event, if the mer-
chant receives insurance for such losses he must
include in his gross income the amount of such
insurance.
Loss of cash by burglary or embezzlement
may be deducted by an entry debiting profit and
loss and crediting cash. The amount of such
loss should be reduced by the amount of insur-
ance covering it and by the reasonable value of
any claim against the embezzler or his sureties
which have an ascertainable value such as a
claim against the surety company. A loss in-
curred through embezzlement is an allowable
deduction from gross income only for the year
in which the embezzlement occurred.
£
(Continued on page 11)
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1365-75 Myrtle Ave.
Brooklyn, N. Y.