All-events test
Encyclopedia
The all-events test, under U.S. federal income tax law
, is the requirement that all the events fixing an accrual
-method taxpayer's right to receive income or incur expense must occur before the taxpayer can report an item of income or expense.
in the taxable year in which the all-events test is met. The all events test is two-pronged concerning the recognition of income, three-pronged when dealing with deductions. It is met when (1) the right to income is fixed (recognition of income) or all events have occurred which establish the fact of liability (deduction), and (2) the amount thereof can be determined with reasonable accuracy. The third prong which is applicable when dealing with an accrual method taxpayer's right to a deduction is (3) economic performance has occurred with respect to the liability. Exceptions apply to certain recurring items.
Certain other exceptions apply to the all-events test:
1. Taxpayers are put on cash method of accounting in those instances where payment precedes performance of or due date of an obligation. This is called the earlier of test. This violates traditional accrual method recognition of income and is an exception to the all-events test because the right to income is not yet fixed. The taxpayer has not yet performed services allowing for the collection of income but through Revenue Ruling the IRS has determined that recognition of income is proper because cash is in hand.
2. Doubt as to Collectibility. This is not a true exception to the all-events test but a clarification. If at the time of sale there was no doubt as to the collectibility of income, doubt that arises subsequent to the time when all events have occurred that fix the right to receipt do not change the fact that all events indeed did occur.
Income tax in the United States
In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...
, is the requirement that all the events fixing an accrual
Accrual
Accrual of something is, in finance, the adding together of interest or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting...
-method taxpayer's right to receive income or incur expense must occur before the taxpayer can report an item of income or expense.
Application
Under an accrual method of accounting, income is includible in gross incomeGross income
Gross income in United States tax law is receipts and gains from all sources less cost of goods sold. Gross income is the starting point for determining Federal and state income tax of individuals, corporations, estates and trusts, whether resident or nonresident."Except as otherwise provided" by...
in the taxable year in which the all-events test is met. The all events test is two-pronged concerning the recognition of income, three-pronged when dealing with deductions. It is met when (1) the right to income is fixed (recognition of income) or all events have occurred which establish the fact of liability (deduction), and (2) the amount thereof can be determined with reasonable accuracy. The third prong which is applicable when dealing with an accrual method taxpayer's right to a deduction is (3) economic performance has occurred with respect to the liability. Exceptions apply to certain recurring items.
Certain other exceptions apply to the all-events test:
1. Taxpayers are put on cash method of accounting in those instances where payment precedes performance of or due date of an obligation. This is called the earlier of test. This violates traditional accrual method recognition of income and is an exception to the all-events test because the right to income is not yet fixed. The taxpayer has not yet performed services allowing for the collection of income but through Revenue Ruling the IRS has determined that recognition of income is proper because cash is in hand.
2. Doubt as to Collectibility. This is not a true exception to the all-events test but a clarification. If at the time of sale there was no doubt as to the collectibility of income, doubt that arises subsequent to the time when all events have occurred that fix the right to receipt do not change the fact that all events indeed did occur.