Publication 538 - Accounting Periods And Methods (Page 7 of 19) in pdf

52-53-Week Tax Year

For examples of situations in which a busi-

method of accounting used to prepare its tax

ness purpose is not shown as well as examples

return. See Accounting Methods, later.

A partnership, S corporation, or personal service

in which a substantial business purpose has

If the entity (including any predecessor or-

corporation can use a tax year other than its

been established, see Revenue Ruling 87 – 57

ganization) does not have at least 47 months of

required tax year if it elects a 52-53-week tax

in Cumulative Bulletin 1987 – 2.

gross receipts (36-month period for requested

year that ends with reference to either its re-

tax year plus additional 11-month period for

quired tax year or a tax year elected under

Natural business year. A taxpayer can es-

comparing requested tax year with other poten-

section 444 (discussed earlier).

tablish a business purpose for a tax year using a

tial tax years), it cannot establish a natural busi-

“natural business year.” A natural business year

A newly formed partnership, S corporation,

ness year using the 25-percent gross receipts

is the annual accounting period encompassing

or personal service corporation can adopt a

test.

all related income and expenses.

52-53-week tax year ending with reference to

If the requested tax year is a 52-53-week tax

An entity changing its tax year so that it

either its required tax year or a tax year elected

year, the calendar month ending nearest the last

coincides with its natural business year has es-

day of the 52-53-week tax year is treated as the

under section 444 without IRS approval. A part-

tablished a business purpose. The natural busi-

last month of the requested tax year for pur-

nership, S corporation, or personal service cor-

ness year of an entity can be determined under

poses of computing the 25-percent gross re-

poration within the scope of Revenue Procedure

any of the following tests.

ceipts test.

2002 – 38 in Internal Revenue Bulletin 2002 – 22

•

can get automatic approval to change its tax

Annual business cycle test.

Automatic approval. A partnership, an S cor-

year to a 52-53-week tax year ending with refer-

•

poration, or a personal service corporation can

Seasonal business test.

ence to its required tax year. For more informa-

get automatic approval to change to a required

•

tion, see the discussion on the 52-53-week tax

25-percent gross receipts test.

tax year discussed earlier, or to a 52-53-week

year, earlier, under Fiscal Year. See also Auto-

tax year ending with reference to such required

matic approval under Business Purpose Tax

Annual business cycle test. Apply this test

tax year. A partnership, an S corporation, or a

Year, next.

if the entity’s gross receipts from sales and serv-

personal service corporation can get automatic

ices for the short period and the three immedi-

approval to retain or change to a natural busi-

ately preceding tax years indicate that the entity

ness year that meets the 25-percent gross re-

Business Purpose Tax Year

has a peak and a non-peak period of business.

ceipts test, discussed earlier, or to a 52-53-week

The natural business year is considered to end

A business purpose tax year is an accounting

tax year ending with reference to such natural

at or one month after the end of the highest peak

period for which a taxpayer establishes a busi-

tax year. An S corporation or corporation elect-

period. A business whose income is steady from

ness purpose. A partnership, S corporation,

ing to be an S corporation can get automatic

month to month throughout the year will not

electing S corporation, or personal service cor-

approval to adopt, change to, or retain its owner-

meet this test.

ship tax year (discussed next) or a 52-53-week

poration can establish a business purpose for a

tax year ending with reference to such owner-

tax year based on all the relevant facts and

Seasonal business test. Apply this test if

ship tax year. For more information, see Reve-

circumstances. See Facts and circumstances

the entity’s gross receipts from sales and serv-

nue Procedure 2002 – 38 in Internal Revenue

test, next. However, the Service anticipates that

ices for the short period and the three immedi-

Bulletin 2002 – 22.

such entity will be granted permission to adopt,

ately preceding tax years indicate that the

change, or retain an annual accounting period

entity’s business is operational for only part of

Ownership tax year. An S corporation or

only in rare and unusual circumstances. In addi-

the year (due to weather conditions, for exam-

corporation electing to be an S corporation can

ple). As a result, during the period the business

tion, an entity can establish a business purpose

get automatic approval to adopt, change to, or

is not operational, it has gross receipts equal to

for a tax year if the tax year coincides with its

retain its ownership tax year. An ownership tax

or less than 10% of its total gross receipts for the

required tax year, natural business year, or own-

year is the tax year that, as of the first day of the

year. The natural business year is considered to

ership tax year. See Natural business year and

requested tax year, constitutes the tax year of

end at or one month after the end of operations

Ownership tax year, later. In considering

one or more shareholders (including sharehold-

for the season.

whether there is a business purpose for a tax

ers changing to that tax year) holding more than

year, significant weight is given to tax factors.

50% of the corporation’s issued and outstanding

25-percent gross receipts test. To apply

shares of stock. For this purpose, a shareholder

this test, take the following steps.

Facts and circumstances test. A taxpayer

that is tax-exempt under section 501(a) is disre-

can establish a business purpose based on all

1) Total the gross receipts from sales and

garded if such shareholder is not subject to tax

the relevant facts and circumstances. Adminis-

services for the most recent 12-month pe-

on any income attributable to the S corporation.

trative and convenience business reasons such

riod that ends with the last month of the

The IRS will not apply this rule to require an S

as the following are not sufficient to establish a

requested tax year. Figure this for the

corporation to change its tax year for any tax

business purpose for a particular tax year.

12-month period that ends before the filing

year beginning before 2003. However, a tax-ex-

of the request. Also total the gross receipts

empt shareholder is not disregarded if the S

1) Using a particular year for regulatory or

from sales and services for the last 2

corporation is wholly owned by such tax-exempt

financial accounting purposes.

months of that 12-month period.

entity. Shareholders that want to change their

tax year must, when requesting permission, fol-

2) Using a hiring pattern, such as typically

2) Determine the percentage of the receipts

low section 1.442-1(b) of the regulations, Reve-

hiring staff during certain times of the year.

for the 2-month period by dividing the total

nue Procedure 2002 – 39 in Internal Revenue

of the last 2-month period by the total for

3) Using a particular year for administrative

Bulletin 2002 – 22, or any other applicable IRS

the entire 12-month period. Carry the per-

purposes, such as:

administrative procedure.

centage to two decimal places.

a) Admission or retirement of partners or

Filing information. To get automatic ap-

3) Figure the percentage following steps (1)

shareholders.

proval, a partnership, S corporation, or corpora-

and (2) for the two 12-month periods just

tion electing to be an S corporation must file a

preceding the 12-month period used in (1).

b) Promotion of staff.

tax return for the short period. The short period

If the percentage determined for each of the

c) Compensation or retirement arrange-

tax return must be filed by the due date, includ-

three years equals or exceeds 25%, the re-

ments with staff, partners, or sharehold-

ing extensions.

quested tax year is the natural business year.

ers.

To get automatic approval to adopt, change,

If one or more tax years (other than the

or retain its tax year, the entity must file a current

requested tax year) produce higher averages of

4) Using a price list, model year, or other item

Form 1128 or Form 2553, Election by a Small

the three percentages than the requested tax

that changes on an annual basis.

Business Corporation.

year, then the requested tax year will not qualify

Form 1128 must be filed no earlier than the

5) Deferring income to partners or sharehold-

as the natural business year under the 25-per-

day following the end of the first tax year for

ers.

cent gross receipts test.

which the adoption, change, or retention is ef-

6) Using a particular year used by related en-

To apply the 25-percent gross receipts test

fective (first effective year) and no later than the

tities and competitors.

for any particular year, the entity must use the

due date (including extensions) for filing the tax

Page 7

Publication 538 - Accounting Periods And Methods Page 7

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