Publication 538 - Accounting Periods And Methods (Page 8 of 18) in pdf

2) The corporation must file a tax return for

No single accounting method is required of

Business and personal items. You can ac-

the short period by the due date, including

all taxpayers. You must use a system that

count for business and personal items using

extensions.

clearly shows your income and expenses and

different accounting methods. For example, you

you must maintain records that will enable you to

can figure your business income under an ac-

3) The books of the corporation must be

file a correct return. In addition to your perma-

crual method, even if you use the cash method

closed as of the last day of the new tax

nent books of account, you must keep any other

to figure personal items.

year. Returns for later years must be made

records necessary to support the entries on your

on the basis of a full 12 months (or 52-53

books and tax returns.

Two or more businesses. If you operate two

weeks) ending on the last day of the new

You must use the same accounting method

or more separate and distinct businesses, you

tax year. The corporation must figure its

from year to year. An accounting method clearly

can use a different accounting method for each.

income and keep its books and records,

shows income only if all items of gross income

No business is separate and distinct, however,

including financial reports and statements

and expenses are treated the same from year to

unless a complete and separate set of books

for credit purposes, on the basis of the

year.

new tax year.

and records is maintained for the business.

If you do not regularly use an accounting

If you use different accounting methods to

4) Taxable income of the corporation for the

method that clearly shows your income, your

create or shift profits or losses between busi-

short period must be figured on an annual

income will be figured under the method that, in

nesses (for example, through inventory adjust-

basis (except for a real estate investment

the opinion of the IRS, does.

ments, sales, purchases, or expenses) so that

trust or a regulated investment company)

income is not clearly reflected, the businesses

and the tax must be figured as shown

Methods you can use. Subject to the preced-

will not be considered separate and distinct.

under Figuring Tax for Short Year, earlier.

ing rules, you can compute your taxable income

5) If the corporation has a net operating loss

under any of the following accounting methods.

(NOL) in the short period required to effect

the change, the NOL generally cannot be

1) Cash method.

Cash Method

carried back. However, a short period NOL

2) Accrual method.

can be carried back or forward if it:

Most individuals and many small businesses

3) Special methods of accounting for certain

a) Is $50,000 or less.

use the cash method of accounting. Generally,

items of income and expenses.

however, if you produce, purchase, or sell mer-

b) Results from a short period of 9 or

4) Combination (hybrid) method using ele-

chandise, you must keep an inventory and use

more months and is less than the NOL

ments of two or more of the above.

an accrual method for sales and purchases of

for a full 12-month period beginning

merchandise. See Cash Method of Accounting

with the first day of the short period.

The cash and accrual methods of accounting

for Qualifying Taxpayers, later, for an exception

are explained later.

to this rule.

6) If there is any unused credit for the short

Special methods. This publication does not

period, the corporation must carry the un-

discuss special methods of accounting for cer-

Income

used credit(s) forward. Unused credit(s)

tain items of income or expenses. For informa-

cannot be carried back.

tion on reporting income using one of the

Under the cash method, you include in your

See Revenue Procedure 2000 – 11 for more

long-term contract methods, see section 460

gross income all items of income you actually or

information.

and its regulations. Publication 535, Business

constructively receive during the tax year. If you

Expenses, discusses methods for deducting

receive property and services, you must include

Form 1128. To make this change, a corpora-

amortization and depletion. The following publi-

their fair market value in income.

tion must file Form 1128 with the director of the

cations also discuss special methods of report-

Internal Revenue Service Center where it files

ing income or expenses.

Constructive receipt. Income is construc-

its income tax return. It should mark the envel-

tively received when an amount is credited to

ope “Attention: ENTITY CONTROL.” The form

1) Publication 225, Farmer’s Tax Guide.

your account or made available to you without

must be filed by the due date (including exten-

2) Publication 537, Installment Sales.

restriction. You need not have possession of it. If

sions) of the short period return required for the

you authorize someone to be your agent and

change. It should type or print “FILED UNDER

3) Publication 946, How To Depreciate Prop-

receive income for you, you are considered to

REV. PROC. 2000 – 11” at the top of

Form

erty.

have received it when your agent receives it.

1128. If the request is denied, the service center

Income is not constructively received if your

will return Form 1128 with an explanation of the

Combination (hybrid) method. Generally,

control of its receipt is subject to substantial

denial.

you can use any combination of cash, accrual,

restrictions or limitations.

and special methods of accounting if the combi-

The request will be denied if Form 1128 is

nation clearly shows income and you use it con-

not filed on time or if the corporation fails to meet

Example 1. Interest is credited to your bank

sistently. However, the following restrictions

the requirements listed earlier. If a corporation

account in December 2001, but you do not with-

changes its tax year without first meeting all the

apply.

draw it or enter it into your passbook until 2002.

conditions, the tax year is considered changed

You must include the amount in gross income

1) If an inventory is necessary to account for

without IRS approval.

for 2001, not 2002.

your income, you must use an accrual

method for purchases and sales. See,

Example 2. You have interest coupons that

however, Cash Method of Accounting for

mature and become payable in 2001, but you do

Accounting Methods

Qualifying Taxpayers, later. You can use

not cash them until 2002. You must include the

the cash method for all other items of in-

interest in gross income for 2001, the year of

come and expenses. See Inventories,

An accounting method is a set of rules used to

constructive receipt. You must include the inter-

later.

determine when and how income and expenses

est in your 2001 income, even if you later ex-

are reported. Your accounting method includes

2) If you use the cash method for figuring

change the coupons for other property, instead

not only your overall method of accounting, but

your income, you must use the cash

of cashing them.

also the accounting treatment you use for any

method for reporting your expenses.

material item.

Delaying receipt of income. You cannot

3) If you use an accrual method for reporting

hold checks or postpone taking possession of

You choose an accounting method when you

your expenses, you must use an accrual

similar property from one tax year to another to

file your first tax return. If you later want to

method for figuring your income.

avoid paying tax on the income. You must report

change your accounting method, you must get

the income in the year the property is received or

IRS approval. See Change

in Accounting

4) Any combination that includes the cash

Method, later.

method is treated as the cash method.

made available to you without restriction.

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Publication 538 - Accounting Periods And Methods Page 8

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