Content area
Full Text
The use of a fiscal year defers reporting of the S corporation's passthrough income to the shareholders and facilitates year-end tax planning. The shareholders can determine their income from the S corporation before their individual calendar tax year ends. This allows them to prepare for the effects of passthrough from the S corporation and implement any appropriate tax planning strategies before the end of their tax years. Further, a fiscal year may result in the deferral of income.
Using a Permitted Year
The S corporation tax-year rules, similar to those governing partnerships, state that an S corporation must use a permitted year. Under Sec. 1378(b), a permitted year is a tax year that (1 ) ends on December 31 or (2) is any other accounting period for which the corporation establishes a business purpose to the satisfaction of the IRS.
A business-purpose fiscal year may be automatically established if it is:
1. A natural business year because it meets a 25% mechanical test;
2. An ownership tax year because it coincides with the tax year used by shareholders holding more than 50% of the corporation's stock on the first day of the requested tax year; or
3. A certain 52-53-week year.
If the requested business-purpose tax year cannot be established under the automatic approval provisions, it must be established based on facts and circumstances. As an alternative to using a calendar year or a business-purpose fiscal year, the corporation may elect a fiscal year if it meets the requirements of Sec. 444.
Choosing a Fiscal Year When the Corporation Elects S Status
When a corporation elects S status by filing a properly completed Form 2553, Election by a Small Business Corporation (Under Section 1362 of the Internal Revenue Code), it simultaneously applies for a tax year. The entry of a month and day in the "selected tax year" space provided on Form 2553 is a formal request...