Entrepreneur Start-Up Series: Part 1 – Choice of Tax Year
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The beginning of the new year often brings a rush of new business start-ups, along with that accounting and tax questions are often some of the most confusing for new business owners. This is the first in a series of common questions and guides for any new start-up. You are welcome to share this information with any colleagues or friends that are planning to establish a new business this year.
Understanding and choosing a tax year for your business. A tax year is the annual accounting period used for keeping books and records and reporting income and expenses.
Generally, you must adopt a tax year before you file your first income tax return. Once a tax year is adopted, you must continue to use that tax year unless you obtain permission to change it from the IRS.
You may select as your tax year either a calendar year, the 12-month period ending on December 31 or a fiscal year, a 12-month period ending on the last day of any month except December or a 52-53 week year.
A calendar year, the most common tax year, must be used if: (1) you do not keep adequate records; (2) you have no annual accounting period; or (3) your present tax year does not qualify as a fiscal year.
A 52-53 week year may vary from 52 to 53 weeks, always ends on the same day of the week, and always ends on either the date that day falls during the last week of a particular calendar month or the date that day falls nearest to the last day of a particular calendar month.
Generally, partnerships, S corporations, and personal service corporations must use “required tax years,” unless a business purpose is established for a different tax year or a 444 election is made. A required year for a partnership is generally a tax year that conforms to the tax years of its partners. For S corporations and personal service corporations, a required year is a calendar year.
A 444 election is available if the partnership, S corporation, or personal service corporation:
(1) is not a member of a tiered structure
(2) has not previously had a 444 election in effect
(3) does not elect a tax year with a deferral period longer than the shorter of three months or the deferral period of the tax year being changed.
A 444 election is made by filing Form 8716 (Election to Have a Tax Year Other Than a Required Tax Year) by the earlier of the 15th day of the fifth month following the month in which the election will be effective or the due date (without extensions) of the return resulting from the election.
If you would like to discuss any specific issues please contact Paul Muret at (918) 301-1100.