Publication 538 - Accounting Periods And Methods (Page 5 of 19) in pdf

Least aggregate deferral of income. The tax

If a partnership changes to the tax year re-

tion for its tax year beginning February 1, 2002,

sulting in the least aggregate deferral, it must file

the testing period is A’s tax year ending January

year that results in the least aggregate deferral

a Form 1128 with the short period return show-

31, 2002.

of income is determined as follows.

ing the computations used to determine that tax

New corporations. The testing period for

1) Figure the number of months of deferral

year. The short period return must indicate at the

the first tax year of a new corporation starts with

top of page 1, “FILED UNDER SECTION

for each partner using one partner’s tax

the first day of the tax year and ends on the

1.706 – 1.”

year. Find the months of deferral by count-

earlier of the following dates.

ing the months from the end of that tax

More information. For more information on

•

The last day of its tax year.

year forward to the end of each other

partnerships, see Publication 541.

•

partner’s tax year.

The last day of the calendar year in which

the tax year begins.

2) Multiply each partner’s months of deferral

S Corporation

figured in step (1) by that partner’s share

of interest in the partnership profits for the

Example. B Corporation’s first tax year be-

If it meets the requirements, a small business

year used in step (1).

gins June 1, 2002. B wants to use a September

corporation can elect to be an S corporation. All

30 fiscal year for its accounting period. B’s test-

S corporations, regardless of when they became

3) Add the amounts in step (2) to get the

ing period for its first tax year is from June 1,

an S corporation, must use a “permitted tax

aggregate (total) deferral for the tax year

2002, through September 30, 2002. If B wants to

year.” A permitted tax year is any of the follow-

used in step (1).

use a March 31 fiscal year, the testing period is

ing.

4) Repeat steps (1) through (3) for each

from June 1, 2002, through December 31, 2002.

•

The calendar year.

partner’s tax year that is different from the

Performance of personal services. Any ac-

•

other partners’ years.

A tax year elected under section 444.

tivity that involves the performance of services in

•

The partner’s tax year that results in the

the fields of health, veterinary services, law,

A 52-53-week tax year ending with refer-

lowest aggregate (total) number is the tax year

engineering, architecture, accounting, actuarial

ence to the calendar year or a tax year

that must be used by the partnership. If the

science, performing arts, or certain consulting

elected under section 444.

services is considered the performance of per-

calculation results in more than one tax year

•

Any other tax year for which the corpora-

sonal services.

qualifying as the tax year with the least aggre-

tion establishes a business purpose.

gate deferral, the partnership can choose any

Employee-owner. An employee-owner of a

one of those tax years as its tax year. However,

For information on S corporations, see the in-

corporation is a person who:

structions for Form 1120 – S.

if one of the tax years that qualifies is the

•

Is an employee of the corporation on any

partnership’s existing tax year, the partnership

Personal Service Corporation

day of the testing period, and

must retain that tax year.

•

Owns any outstanding stock of the corpo-

A personal service corporation must use a cal-

Example. A and B each have a 50% interest

ration on any day of the testing period.

endar tax year unless any of the following apply.

in partnership P, which uses a fiscal year ending

•

June 30. A uses the calendar year and B uses a

The corporation makes an election under

Independent contractor. A person who

fiscal year ending November 30. P must change

section 444.

owns any outstanding stock of the corporation

its tax year to a fiscal year ending November 30

•

and who performs personal services for or on

The corporation elects to use a

because this results in the least aggregate

behalf of the corporation is treated as an em-

52-53-week tax year ending with reference

deferral of income to the partners, as shown in

ployee of the corporation. This rule applies even

to the calendar year or a tax year elected

the following table.

if the legal form of the person’s relationship to

under section 444.

the corporation is such that the person would be

•

Year

Months Interest

The corporation establishes a business

considered an independent contractor for other

End

Year

Profits

purpose for a fiscal year.

purposes.

12/31: End

Interest

Deferral Deferral

These issues are discussed later.

More information. For more information on

12/31

0.5

-0-

the tax year of a personal service corporation,

A corporation is a personal service corpora-

11/30

0.5

5.5

see section 1.441-3 of the regulations.

tion if all the following conditions are met.

Total Deferral . . . . . . . . . . . . . . .

5.5

•

The corporation is a C corporation.

Year

Months Interest

•

Section 444 Election

The corporation’s principal activity during

End

Year

Profits

the testing period, defined later, is the per-

11/30: End

Interest

Deferral Deferral

A partnership, S corporation, electing S corpora-

formance of personal services.

tion, or personal service corporation can elect

12/31

0.5

•

Employee-owners of the corporation per-

under section 444 to use a tax year other than its

11/30

0.5

-0-

form a substantial part of the services dur-

required tax year. Certain restrictions apply to

Total Deferral . . . . . . . . . . . . . . .

0.5

the election. In addition, a partnership or S cor-

ing the testing period.

poration may have to make a payment for the

•

Employee-owners own more than 10% of

deferral period. See Required payment for part-

When determination is made. The deter-

the corporation’s stock on the last day of

nership or S corporation, later. The section 444

the testing period.

mination of the tax year under the least aggre-

election does not apply to any partnership, S

gate deferral rules must generally be made at

corporation, or personal service corporation that

the beginning of the partnership’s current tax

Principal activity. The principal activity of a

establishes a business purpose for a different

year. However, the IRS can require the partner-

corporation is considered to be the performance

period, explained later.

ship to use another day or period that will more

of personal services if, during the testing period,

A partnership, S corporation, or personal

accurately reflect the ownership of the partner-

the corporation’s compensation costs for per-

service corporation can make a section 444

ship. This could occur, for example, if a partner-

sonal service activities are more than 50% of its

election if it meets all the following requirements.

ship interest was transferred for the purpose of

total compensation costs.

•

It is not a member of a tiered structure

qualifying for a particular tax year.

Testing period. Generally, the testing period

(defined in section 1.444-2T of the regula-

Short period return. When a partnership

tions).

for a tax year is the prior tax year.

changes its tax year, a short period return must

•

It has not previously had a section 444

be filed. The short period return covers the

Example. Corporation A has been in exis-

election in effect.

months between the end of the partnership’s

tence since 1980. It has always used a January

•

prior tax year and the beginning of its new tax

31 fiscal year for its accounting period. To deter-

It elects a year that meets the deferral

year.

mine whether A is a personal service corpora-

period requirement.

Page 5

Publication 538 - Accounting Periods And Methods Page 5

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