Question

A provision in the law that compels accrual basis taxpayers to pay a tax on prepaid income in the year received and not when earned is consistent with generally accepted accounting principles.

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Answer 1

The law requiring accrual basis taxpayers to pay tax on prepaid income when received, rather than when earned, is not consistent with GAAP, which requires recognizing income when earned. This divergence arises due to differing objectives between accounting principles and taxation laws which are influenced by principles like the benefit principle and the ability-to-pay principle.

Step-by-step explanation:

The question relates to tax principles and the recognition of income by accrual basis taxpayers. Specifically, it touches on the requirement that some taxpayers must recognize income when it is received rather than when it is earned.

This concept goes against the traditional accrual method dictated by generally accepted accounting principles (GAAP), which recognizes income when it is earned and expenses when they are incurred, regardless of when the payment occurs.

In the context of taxation, the Revenue Act of 1942 is an example which showcases historical changes in tax law, such as the lowering of the minimum income requirement for federal tax purposes. This act, and tax laws like it, can sometimes diverge from GAAP for various reasons, including fiscal policy goals.

Furthermore, unlike GAAP, tax legislation can be influenced by principles such as the benefit principle of taxation and the ability-to-pay principle, aiming to collect revenue in a way that is perceived as equitable and capable of sustaining government programs and services.