Accounting Periods

A corporation must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses. Generally, corporations can use either a calendar year or a fiscal year as its tax year. A corporation must adopt a tax year by the due date (not including extensions) of its first income tax return.

A personal service corporation must use a calendar year as its tax year unless:

• It elects to use a 52–53 week tax year that ends with reference to the calendar year;
• It can establish a business purpose for a different tax year and obtains approval of the IRS. See Form 1128, Application To Adopt, Change, or Retain a Tax Year, and Publication 538; or
• It elects under section 444 of the Internal Revenue Code to have a tax year other than a calendar year. Use Form 8716, Election to Have a Tax Year Other Than a Required Tax Year, to make the election.

If a personal service corporation makes a section 444 election, its deduction for certain amounts paid to employee-owners may be limited. See Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC), to figure the maximum deduction.

Generally, a corporation must get the consent of the IRS before changing its tax year by filing Form 1128. However, under certain conditions, a corporation can change its tax year without getting the consent. For more information see Form 1128 and Publication 538.