Publication 538 - Accounting Periods And Methods (Page 3 of 19) in pdf

vides automatic approval procedures for

able to use a relief procedure, explained later,

you must file a return for the short tax year if it

individuals.

and claim a refund of part of the tax you paid.

covers more than 6 but fewer than 359 days.

If the short period created by the change is

Revenue Procedures 2002 – 37 and 2002 – 38

359 days or more, treat it as a full tax year. If the

General rule. Income tax for a short tax year is

are in Internal Revenue Bulletin 2002 – 22. Rev-

short period created is 6 days or fewer, it is not a

figured on an annual basis. However, self-em-

enue Procedure 66 – 50 is in Cumulative Bulletin

separate tax year. Include it as part of the follow-

ployment tax is figured on the actual self-em-

1966 – 2. Revenue Procedure 81 – 40 is in Cu-

ing year.

ployment income for the short period.

mulative Bulletin 1981 – 2.

For example, if you use a calendar year and

Individuals. An individual must figure in-

the IRS approves your change to a 52-53-week

Short Tax Year

come tax for the short tax year as follows.

tax year ending on the Monday nearest to Sep-

tember 30, you must file a return for the short

A short tax year is a tax year of less than 12

1) Determine your adjusted gross income for

period from January 1 to September 30.

months. A short period tax return may be re-

the short tax year and then subtract your

Figure the tax for the short tax year as shown

quired when you (as a taxable entity):

actual itemized deductions for the short tax

previously, except that you prorate on a daily

year. (You must itemize deductions when

•

basis, rather than monthly. Use 365 days (re-

Are not in existence for an entire tax year,

you file a short period tax return.)

gardless of the number of days in the calendar

year) instead of 12 months and the number of

2) Multiply the dollar amount of your exemp-

•

Change your accounting period.

days in the short tax year instead of the number

tions by the number of months in the short

of months.

Tax on a short period tax return is figured differ-

tax year and divide the result by 12.

ently for each situation.

Relief procedure. Individuals and corpora-

3) Subtract the amount in (2) from the

tions can use a relief procedure to figure the tax

amount in (1). This is your modified taxa-

Not in Existence Entire Year

for the short tax year. It may result in less tax.

ble income.

Under this procedure, the tax is figured by two

Even if you (a taxable entity) were not in exis-

4) Multiply the modified taxable income in (3)

separate methods. If the tax figured under both

tence for the entire year, a tax return is required

by 12, then divide the result by the number

methods is less than the tax figured under the

for the time you were in existence. Require-

of months in the short tax year. This is

general rule, you can file a claim for a refund of

ments for filing the return and figuring the tax are

your annualized income.

part of the tax you paid. For more information,

generally the same as the requirements for a

see section 443(b)(2).

5) Figure the total tax on your annualized in-

return for a full tax year (12 months) ending on

come using the appropriate tax rate sched-

the last day of the short tax year.

Alternative minimum tax. To figure the alter-

ule.

native minimum tax (AMT) due for a short tax

Example 1. Corporation X was organized

year:

6) Multiply the total tax by the number of

on July 1, 2001. It elected the calendar year as

months in the short tax year and divide the

1) Figure the annualized alternative minimum

its tax year and its first tax return was due March

result by 12. This is your tax for the short

taxable income (AMTI) for the short tax

15, 2002. This short period return will cover the

tax year.

period by doing the following.

period from July 1, 2001, through December 31,

2001.

a) Multiply the AMTI by 12.

Example. Mike and Sara Smith have an ad-

justed gross income of $48,000 for their short

Example 2. A calendar year corporation

b) Divide the result by the number of

tax year. Their itemized deductions for January

dissolved on July 23, 2002. Its final return is due

months in the short tax year.

1 through September 30, 2001, total $12,400

by October 15, 2002, and it will cover the short

and they can claim exemptions for themselves,

period from January 1, 2002, to July 23, 2002.

2) Multiply the annualized AMTI by the appro-

and their two children. Each exemption is

priate rate of tax under section 55(b)(1).

$2,900. They figure the tax on their joint return

Example 3. Partnership YZ was formed on

The result is the annualized AMT.

for that period as follows.

September 4, 2001, and elected to use a fiscal

3) Multiply the annualized AMT by the num-

year ending November 30. Partnership YZ must

1) $48,000 − $12,400 = $35,600

ber of months in the short tax year and

file its first tax return by March 15, 2002. It will

divide the result by 12.

2) $2,900 × 4 × 9/12 = $8,700

cover the short period from September 4, 2001,

to November 30, 2001.

For information on the alternative minimum

3) $35,600 − $8,700 = $26,900 (modified tax-

tax for individuals, see the instructions for Form

able income)

Death of individual. When an individual dies,

6251, Alternative Minimum Tax – Individuals.

a tax return must be filed for the decedent by the

4) $26,900 × 12/9 = $35,867 (annualized in-

For information on the alternative minimum tax

15th day of the 4th month after the close of the

for corporations, see Publication 542, or the

come)

individual’s regular tax year. The decedent’s fi-

instructions to Form 4626, Alternative Minimum

5) Tax on $35,867 = $5,381 (from 2001 tax

nal return will be a short period tax return unless

Tax – Corporations.

rate schedule)

he or she dies on the last day of the regular tax

Tax withheld from wages. You can take a

year.

6) $5,381 × 9/12 = $4,036 (tax for short tax

credit against your income tax liability for federal

year)

income tax withheld from your wages. Federal

Example. Agnes Green was a single, calen-

income tax is withheld on a calendar year basis.

dar year taxpayer. She died on March 6, 2002.

Corporations. A corporation figures tax for

The amount withheld in any calendar year is

Her final tax return must be filed by April 15,

the short tax year under the general rule de-

allowed as a credit for the tax year beginning in

2003. It will cover the short period from January

scribed earlier for individuals except there is no

the calendar year.

1, 2002, to March 6, 2002.

adjustment for personal exemptions.

Improper Tax Year

Example. Because a calendar year corpo-

Figuring Tax for Short Year

ration changed its tax year, it must file a short

A calendar year is a tax year of 12 months that

period tax return for the 6-month period ending

If the IRS approves a change in your tax year or

ends on December 31 and a fiscal year is a tax

June 30, 2001. For the short tax year, it had

you are required to change your tax year, you

year of 12 months that ends on the last day of

income of $40,000 and no deductions. The

must figure the tax and file your return for the

any month other than December. A 52-53-week

corporation’s annualized income is $80,000

short tax period. The short tax period begins on

tax year is also a fiscal year, but may not end on

($40,000 × 12/6). The tax on $80,000 is

the first day after the close of your old tax year

the last day of a month. If you begin business

$15,450. The tax for the short tax year is $7,725

and ends on the day before the first day of your

operations on a day other than the first day of a

($15,450 × 6/12).

new tax year.

calendar month and adopt a tax year of exactly

You figure tax for a short year under the

52-53-week tax year. If you change the

12 months from the date operations began, you

general rule, explained next. You may then be

month in which your 52-53-week tax year ends,

will have adopted an improper tax year. You do

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Publication 538 - Accounting Periods And Methods Page 3

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