Chapter 13 Tax Accounting

Average annual gross receipts are computed

Dividing the sum of the gross receipts for so many of the previous three years as the taxpayer conducted business by the number of such tax years.

IRS Permission or Consent

In order to secure IRS approval to change accounting period, the taxpayer must file a Form 1128 (Application To Adopt, Change, or Retain a Tax Year) by the due date( not including extensions) of the federal income tax return for the first effective year.

Change of Accounting Periods

Required tax years are defined by regulation for most types of business entities. If a taxpayer change =s its annual accounting period, the new accounting period shall become the taxpayer's taxable year only if the change is approved by the IRS.Code Sec.442.A change in accounting period may be approved if there are substantial business reasons for the change.

Individuals-Calendar Year

Since most individual taxpayers keep no books and records prior to filing a first tax return, the calendar year is the default tax year.

Sole Proprietors

Sole proprietors of a business must use the same period for a business tax reporting purposes that they use for their personal books.

Election of the Tax Year

Taxpayers, other than most C corporations,generally must use a ''required taxable year''.Reg $1.441-1.There are a few exceptions.For example, a partnership, S corporation, or Personal Service Corporation may use taxable year other than its required taxable year if it so elects under Code Sec.444 or establishes a business purpose to the satisfaction of the IRS under Code Sec.442.

Business factors

The choice of an annual accounting period depends on several business factors, such as a slack season when personnel are available, or a date when inventories and bank loans are low, which in turn presents a favorable balance sheer for credit purposes.

A tax shelter

1.Any enterprise, other than C corporation, for which,at any time,interests in such enterprise have been offered for sale in any offering required to be registered with any federal or state securities agency;(2) any partnership or other entity if more than 35 percent of the losses of such entity during the year are allocable to limited partners or limited partnerships;or(3) any partnership,investment plan,or other plan or arrangement the principal purpose of which is the avoidance of federal income tax.Reg.$1.448-1T(b)>

Corporations

A corporate taxpayer can select its year based on the particular circumstances of the initial period, rather than any adherence to the concept of the natural business year.

Natural Business Year

A fiscal year that ends when business activities have reached the lowest point in an annual operating cycle.

individuals

A newly married husband or wife can obtain automatic approval to change his or her tax year in order to use the tax year of the other spouse so that a joint return can be filed for the first or second tax year of that spouse ending after the date of the marriage.

S corporation

A tax year other than a calendar year may used if the S corporation can satisfy the IRS that there is a legitimate business purposes for such use.Code Sec.1378(b)>

Accounting period Tax Planning

A taxpayer should consider the various factors influencing the choice of accounting period as soon as possible after beginning operations.

Partnerships, S Corporations, and Personal Service Corporations.

All partnerships, S corporations, and personal service corporations generally must conform their tax years tot he tax year of their owners, unless such entities can establish a business purpose fr having a different year.

Estate

An estate is a new taxpayer, and it may adopt any tax without obtaining prior approval.

Corporation

Calendar of fiscal year including 52/53 week. Personal Service corporation section 444 election.

Income Average for farming and fishing businesses

Code Sec. 1301 allows individual farmers and fisherman to elect to use income averaging over a three-year period when determining tax liability.

Election of Tax year other than required tax year

Code Sec. 444 allows certain partnerships, S corporations, and personal service corporations to elect a tax year that is different from their required tax year.

Gross receipts are computed

Deducting sales returns and allowances from gross receipts.sale from business operations with the exception pf dividends,interest,gross rents, other income, and net gains and losses from sales

Exceptions to Permission requirements

Despite the prior approval requirements, there are some instances when a tax year may be changed without receiving advance approval.

Partnership

Except for partnerships that qualify under the business purpose exception or make an election under Code Sec. 444, a partnership must use the same tax year as that of its partners who have a majority interest ( an aggregate interest of greater than 50 percent) in partnership profits and capital.If partners owning a majority interest have different tax years, the partnership must adopt the same tax year as that of its principal partners. When neither condition is met, a partnership is required to adopt a year that results in least aggregate deferral of income to the partners.

General Rule

The general rule calls for the tax to be computed for a short period by placing the short period's taxable income on an annual basis.

business year

The intent of an entity to make its tax year coincide with its natural business year constitutes a valid business purpose.A business with a steady monthly income does not have a natural business year.A natural general business year generally exists if, in the last two months of the selected tax year, a taxpayer receives at least 25 percent of its gross receipts and has done so for three consecutive 12- month periods.

When computing annual average gross receipts

The three-year period does not include the current tax year in which the determination is being made.

Limitations on use of cash method

Three types f taxpayers cannot use the cash method of accounting for tax purposes.(Code Sec.448).These three types of taxpayers include: 1.C corporation 2.Partnerships which have a C corporation as a partner 3.Tax shelter

Trusts

Trusts, other than charitable and tax-exempt trusts, must use the calendar year.Code Sec.644.

short tax year

When a change in an accounting period is instituted, a separate return is filed for the short period beginning with the day following the close of the old tax year and ending with the day preceding the first day of the new tax year.

Corporations

businesses that are owned by many investors who buy shares of stock. Rev.Proc. 2006-45, provides procedures for a corporation(other than an S corporation) to obtain automatic approval to change its annual accounting period.

cash method

the vast majority of individuals and many businesses use of the cash method, primarily because of its simplicity.It generally used by taxpayers whose principal income is derived from the performance of a service.