Publication 538 - Accounting Periods And Methods (Page 8 of 19) in pdf

return for the first effective year. In the case of a

c) An S corporation (and does not attempt

5) If there is any unused credit for the short

change, the first effective year is the short period

period, the corporation must carry the un-

to make an S corporation election for

required to effect the change.

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

the tax year immediately following the

cannot be carried back.

short period unless changing to a per-

A corporation that elects to be an S corpora-

tion and requests to adopt, retain, or change its

mitted tax year).

See Revenue Procedure 2002 – 37 in Inter-

tax year must file Form 2553. The form must be

nal Revenue Bulletin 2002 – 22 for more infor-

d) A personal service corporation.

filed when the election to be an S corporation is

mation.

filed. Generally, such election must be filed at

e) An interest-charge domestic interna-

Form 1128. To get automatic approval to

any time during either of the following tax years.

tional sales corporation (IC – DISC) or

change its tax year, a corporation must file Form

foreign sales corporation (FSC) or a

•

The tax year that immediately precedes

1128 by the due date (including extensions) for

shareholder in either. See Caution,

the tax year for which the election is to be

filing the tax return for the short period required

later.

effective.

to effect such change.

•

f) A controlled foreign corporation or for-

Form 1128 must be filed with the Director,

The tax year for which the election is to be

eign personal holding company. See

Internal Revenue Service Center, Attention:

effective, provided the election is made

Caution, later.

ENTITY CONTROL, where the corporation’s re-

before the 16th day of the third month of

turn is filed. At the top of page 1 of the Form

the tax year.

g) A tax-exempt organization, except

1128, type or print “FILED UNDER REV. PROC.

those exempt under section 521, 526,

2002 – 37.” No copies of Form 1128 are to be

Form 1128 and Form 2553 must be filed with

527, or 528.

sent to the IRS national office. However, a copy

the Director, Internal Revenue Service Center,

must be attached to the tax return filed for the

h) A cooperative association with a loss in

Attention: ENTITY CONTROL, where the entity

short period required to effect the change.

the short period required to effect the

files its tax return. At the top of page 1 of the

The request will be denied if Form 1128 is

tax year change unless more than 90%

Form 1128 or Form 2553, type or print “FILED

not filed on time or if the corporation fails to meet

of the patrons of the association are the

UNDER REV. PROC. 2002 – 38.” No copies of

the requirements listed earlier. If a corporation

Form 1128 or Form 2553 are to be sent to the

same in the year before and after the

changes its tax year without first meeting all the

IRS national office. However, a copy must be

change and in the short period.

conditions, the tax year is considered changed

attached to the tax return for the first effective

i) A corporation with a section 936 elec-

without IRS approval.

year.

tion in effect.

For more information on these tax year re-

Nonautomatic approval. Corporations that

j) A corporation not described in items

quirements, see Revenue Ruling 87 – 57 in Cu-

cannot get automatic approval to change their

(2a) through (2i), listed above, that has

mulative Bulletin 1987 – 2 and Revenue

tax year must get IRS approval under section

Procedure 2002 – 38 in Internal Revenue Bulle-

a required tax year.

442 and the related regulations. See also Reve-

tin 2002 – 22.

nue Procedure 2002 – 39 in Internal Revenue

Bulletin 2002 – 22.

For exceptions to items (2a), (2b), (2e),

Corporations

and (2f), listed above, see Revenue

Procedure 2002 – 37.

CAUTION

A new corporation establishes its tax year when

Accounting Methods

it files its first tax return. A newly reactivated

corporation that has been inactive for a number

Corporations that qualify and want to change

of years is treated as a new taxpayer for the

An accounting method is a set of rules used to

their tax year using this automatic procedure

purpose of adopting a tax year. An S corporation

determine when and how income and expenses

must also comply with the following conditions.

or a personal service corporation must use the

are reported. Your accounting method includes

required tax year rules, discussed earlier, to

not only your overall method of accounting, but

1) The corporation must file a tax return for

establish a tax year.

also the accounting treatment you use for any

the short period by the due date, including

material item.

extensions.

You choose an accounting method when you

Change in Tax Year

2) The books of the corporation must be

file your first tax return. If you later want to

closed as of the last day of the first effec-

change your accounting method, you must get

A corporation that wants to change its tax year

tive year. Returns for later years must be

IRS approval. See Change in Accounting

must generally get IRS approval either under the

made on the basis of a full 12 months (or

Method, later.

automatic approval procedures or the nonauto-

52-53 weeks) ending on the last day of the

No single accounting method is required of

matic approval procedures.

requested tax year. The corporation must

all taxpayers. You must use a system that

clearly shows your income and expenses and

figure its income and keep its books and

Automatic approval. Certain C corporations

you must maintain records that will enable you to

records, including financial reports and

can automatically change their tax year. A cor-

file a correct return. In addition to your perma-

statements to creditors, on the basis of the

poration can automatically change to (or from) a

nent books of account, you must keep any other

requested tax year.

52-53-week tax year or to a natural business

records necessary to support the entries on your

year that meets the 25-percent gross receipts

3) Taxable income of the corporation for the

books and tax returns.

test (discussed earlier under 25-percent gross

short period must be figured on an annual

You must use the same accounting method

receipts test). The corporation must, however,

basis and the tax must be figured as

from year to year. An accounting method clearly

meet all the following criteria.

shown under Figuring Tax for Short Year,

shows income only if all items of gross income

earlier.

and expenses are treated the same from year to

1) It has not changed its annual accounting

year.

period within the most recent 48-month pe-

4) If the corporation has a net operating loss

If you do not regularly use an accounting

riod ending with the last month of the re-

(NOL) or capital loss (CL) in the short pe-

method that clearly shows your income, your

quested tax year. For a list of changes not

riod required to effect the change, the NOL

income will be figured under the method that, in

considered a change in accounting period,

or CL generally cannot be carried back.

the opinion of the IRS, does clearly reflect in-

see Revenue Procedure 2002 – 37 in Inter-

However, a short period NOL or CL can be

come.

nal Revenue Bulletin 2002 – 22.

carried back or carried over if it:

2) It is not any of the following:

Methods you can use. Subject to the preced-

a) Is $50,000 or less.

ing rules, you can compute your taxable income

a) A member of a partnership. See Cau-

b) Results from a short period of 9 months

under any of the following accounting methods.

tion, later.

or longer and is less than the NOL or

•

Cash method.

b) A beneficiary of a trust or an estate.

CL for a full 12-month period beginning

•

See Caution, later.

with the first day of the short period.

Accrual method.

Page 8

Publication 538 - Accounting Periods And Methods Page 8

Related Articles

Related forms

Related Categories