Stan and​ Susan, two calendar year​ taxpayers, are starting a new business to manufacture and sell digital circuits. They intend to incorporate the business with​ $600,000 of their own capital and​ $2 million of equity capital obtained from other investors. The company expects to incur organizational and​ start-up expenditures of​ $100,000 in the first year. Inventories are a material​ income-producing factor. The company also expects to incur losses of​ $500,000 in the first two years of operations and substantial research and development expenses during the first three years. The company expects to break even in the third year and be profitable at the end of the fourth​ year, even though the nature of the digital circuit business will require continual research and development activities. What accounting methods and tax elections must Stan and Susan consider in their first year of​ operation? For each method and​ election, explain the possible alternatives and the advantages and disadvantages of each alternative.
1.) First, Stan and Susan need to choose an accounting period. They can generally select either a calendar year or a fiscal year. A fiscal year can permit an income deferral. If they elect​ S-corporation status they are generally required to use a calendar year.
2.) Stan and Susan must also select an accounting method. They are required to use the accrual method of accounting for sales-related items because inventories are a materials income-producing factor, but they may want to use the cash method for other items as long as they are eligible.
3.) Next, Stan and Susan need to select an accounting method that would be best for their ___________(inventory, capital, stock). Because the price of digital circuits has declined in recent​ years, the ___________ (FIFO, LIFO) method does not appear to be a logical choice if Stan and Susan prefer to lower their taxable income.