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taxmap/pubs/p538-000.htm#en_us_201212_publink1000270574
Publication 538

Accounting 
Periods and 
Methods

rule

taxmap/pubs/p538-000.htm#en_us_201212_publink1000270575Introduction

Every taxpayer (individuals, business entities, etc.) must figure taxable income on the basis of an annual accounting period called a tax year. The calendar year is the most common tax year. Other tax years include a fiscal year and a short tax year.
Each taxpayer must use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and the accrual method.
Under the cash method, you generally report income in the tax year you receive it, and deduct expenses in the tax year in which you pay them.
Under the accrual method, you generally report income in the tax year you earn it, regardless of when payment is received. You deduct expenses in the tax year you incur them, regardless of when payment is made.
Tax Tip
This publication explains some of the rules for accounting periods and accounting methods. In some cases, you may have to refer to other sources for a more in-depth explanation of the topic.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270577

Comments and suggestions.(p1)

rule
We welcome your comments about this publication and your suggestions for future editions.
You can write to us at the following address:

Internal Revenue Service
Business, Exempt Organization and International Forms and Publications Branch
SE:W:CAR:MP:T:B
1111 Constitution Ave. NW, IR-6526
Washington, DC 20224


We respond to many letters by telephone. Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence.
You can email us at taxforms@irs.gov. Please put "Publications Comment" on the subject line. You can also send us comments from www.irs.gov/formspubs. Select "Comment on Tax Forms and Publications" under "More information."
Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000289411
Ordering forms and publications.(p2)
Visit www.irs.gov/formspubs to download forms and publications, call 1-800–829–3676, or write to the address below and receive a response within 10 days after your request is received.

Internal Revenue Service
1201 N. Mitsubishi Motorway
Bloomington, IL 61705-6613


taxmap/pubs/p538-000.htm#en_us_201212_publink1000289412
Tax Questions.(p2)
If you have a tax question, check the information available on IRS.gov or call 1-800-829-1040. We cannot answer tax questions sent to the above address.

Reminders(p2)


taxmap/pubs/p538-000.htm#en_us_201212_publink1000270579
Photographs of missing children.(p2)
The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child.

taxmap/pubs/p538-000.htm#TXMP41ea0da4

Useful items

You may want to see:


Publication
 537 Installment Sales
 541 Partnerships
 542 Corporations
Form (and Instructions)
 1128: Application To Adopt, Change, or Retain a Tax Year
 2553: Election by a Small Business Corporation
 3115: Application for Change in Accounting Method
 8716: Election To Have a Tax Year Other Than a Required Tax Year
See Ordering forms and publications, earlier for information about getting these publications and forms.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270580

(p2)

rule
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270581

Accounting Periods(p2)

rule
You must use a tax year to figure your taxable income. A tax year is an annual accounting period for keeping records and reporting income and expenses. An annual accounting period does not include a short tax year (discussed later). You can use the following tax years:
Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. You cannot adopt a tax year by merely:
This section discusses:
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270582

Calendar Year(p2)

rule
A calendar year is 12 consecutive months beginning on January 1st and ending on December 31st.
If you adopt the calendar year, you must maintain your books and records and report your income and expenses from January 1st through December 31st of each year.
If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you obtain approval from the IRS to change it, or are otherwise allowed to change it without IRS approval. See Change in Tax Year, later.
Generally, anyone can adopt the calendar year. However, you must adopt the calendar year if:
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270583

Fiscal Year(p3)

rule
A fiscal year is 12 consecutive months ending on the last day of any month except December 31st. If you are allowed to adopt a fiscal year, you must consistently maintain your books and records and report your income and expenses using the time period adopted.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270584

52-53-Week Tax Year(p3)

rule
You can elect to use a 52-53-week tax year if you keep your books and records and report your income and expenses on that basis. If you make this election, your 52-53-week tax year must always end on the same day of the week. Your 52-53-week tax year must always end on:
For example, if you elect a tax year that always ends on the last Monday in March, your 2012 tax year will end on March 25, 2013.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270585

Election.(p3)

rule
To make the election for the 52-53-week tax year, attach a statement with the following information to your tax return.
  1. The month in which the new 52-53-week tax year ends.
  2. The day of the week on which the tax year always ends.
  3. The date the tax year ends. It can be either of the following dates on which the chosen day:
    1. Last occurs in the month in (1), above, or
    2. Occurs nearest to the last day of the month in (1), above.
When you figure depreciation or amortization, a 52-53-week tax year is generally considered a year of 12 calendar months.
To determine an effective date (or apply provisions of any law) expressed in terms of tax years beginning, including, or ending on the first or last day of a specified calendar month, a 52-53-week tax year is considered to:
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270586

Example.(p3)

Assume a tax provision applies to tax years beginning on or after July 1, 2012, which happens to be a Sunday. For this purpose, a 52-53-week tax year that begins on the last Tuesday of June, which falls on June 26, 2012, is treated as beginning on July 1, 2012.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270587

Short Tax Year(p3)

rule
A short tax year is a tax year of less than 12 months. A short period tax return may be required when you (as a taxable entity): Tax on a short period tax return is figured differently for each situation.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270588

Not in Existence Entire Year(p3)

rule
Even if a taxable entity was not in existence for the entire year, a tax return is required for the time it was in existence. Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270589

Example 1.(p3)

XYZ Corporation was organized on July 1, 2012. It elected the calendar year as its tax year. Therefore, its first tax return was due March 15, 2013. This short period return will cover the period from July 1, 2012, through December 31, 2012.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270590

Example 2.(p3)

A calendar year corporation dissolved on July 23, 2012. Its final return is due by October 15, 2012. It will cover the short period from January 1, 2012, through July 23, 2012.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270591

Death of individual.(p3)

rule
When an individual dies, a tax return must be filed for the decedent by the 15th day of the 4th month after the close of the individual's regular tax year. The decedent's final return will be a short period tax return that begins on January 1st, and ends on the date of death. In the case of a decedent who dies on December 31st, the last day of the regular tax year, a full calendar-year tax return is required.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270592

Example.(p3)

rule
Agnes Green was a single, calendar year taxpayer. She died on March 6, 2012. Her final income tax return must be filed by April 15, 2013. It will cover the short period from January 1, 2012, to March 6, 2012.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270593

Figuring Tax for Short Year(p4)

rule
If the IRS approves a change in your tax year or you are required to change your tax year, you must figure the tax and file your return for the short tax period. The short tax period begins on the first day after the close of your old tax year and ends on the day before the first day of your new tax year.
Figure tax for a short year under the general rule, explained below. You may then be able to use a relief procedure, explained later, and claim a refund of part of the tax you paid.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270594

General rule.(p4)

rule
Income tax for a short tax year must be annualized. However, self-employment tax is figured on the actual self-employment income for the short period.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270595
Individuals.(p4)
An individual must figure income tax for the short tax year as follows.
  1. Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. You must itemize deductions when you file a short period tax return.
  2. Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12.
  3. Subtract the amount in (2) from the amount in (1). The result is your modified taxable income.
  4. Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. The result is your annualized income.
  5. Figure the total tax on your annualized income using the appropriate tax rate schedule.
  6. Multiply the total tax by the number of months in the short tax year and divide the result by 12. The result is your tax for the short tax year.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270596

Relief procedure.(p4)

rule
Individuals and corporations can use a relief procedure to figure the tax for the short tax year. It may result in less tax. Under this procedure, the tax is figured by two separate methods. If the tax figured under both methods is less than the tax figured under the general rule, you can file a claim for a refund of part of the tax you paid. For more information, see section 443(b)(2) of the Internal Revenue Code.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270597

Alternative minimum tax.(p4)

rule
To figure the alternative minimum tax (AMT) due for a short tax year:
  1. Figure the annualized alternative minimum taxable income (AMTI) for the short tax period by completing the following steps.
    1. Multiply the AMTI by 12.
    2. Divide the result by the number of months in the short tax year.
  2. Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1) of the Internal Revenue Code. The result is the annualized AMT.
  3. Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12.
For information on the AMT for individuals, see the Instructions for Form 6251, Alternative Minimum Tax–Individuals. For information on the AMT for corporations, see the Instructions to Form 4626, Alternative Minimum Tax–Corporations.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270598

Tax withheld from wages.(p4)

rule
You can claim a credit against your income tax liability for federal income tax withheld from your wages. Federal income tax is withheld on a calendar year basis. The amount withheld in any calendar year is allowed as a credit for the tax year beginning in the calendar year.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270599

Improper Tax Year(p4)

rule
Taxpayers that have adopted an improper tax year must change to a proper tax year. For example, if a taxpayer began business on March 15 and adopted a tax year ending on March 14 (a period of exactly 12 months), this would be an improper tax year. See Accounting Periods, earlier, for a description of permissible tax years.
To change to a proper tax year, you must do one of the following.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270600

Change in Tax Year(p4)

rule
Generally, you must file Form 1128 to request IRS approval to change your tax year. See the Instructions for Form 1128 for exceptions. If you qualify for an automatic approval request, a user fee is not required.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270601

Individuals(p4)

rule
Generally, individuals must adopt the calendar year as their tax year. An individual can adopt a fiscal year provided that the individual maintains his or her books and records on the basis of the adopted fiscal year.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270602

Partnerships,
S Corporations,
and Personal Service
Corporations (PSCs)(p5)

rule
Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. A required tax year is a tax year that is required under the Internal Revenue Code and Income Tax Regulations. The entity does not have to use the required tax year if it receives IRS approval to use another permitted tax year or makes an election under section 444 of the Internal Revenue Code (discussed later). The following discussions provide the rules for partnerships, S corporations, and PSCs.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270603

Partnership(p5)

rule
A partnership must conform its tax year to its partners' tax years unless any of the following apply.The rules for the required tax year for partnerships are as follows.
Tax Tip
If a partnership changes to a required tax year because of these rules, it can get automatic approval by filing Form 1128.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270605

Least aggregate deferral of income.(p5)

rule
The tax year that results in the least aggregate deferral of income is determined as follows.
  1. Figure the number of months of deferral for each partner using one partner's tax year. Find the months of deferral by counting the months from the end of that tax year forward to the end of each other partner's tax year.
  2. Multiply each partner's months of deferral figured in step (1) by that partner's share of interest in the partnership profits for the year used in step (1).
  3. Add the amounts in step (2) to get the aggregate (total) deferral for the tax year used in step (1).
  4. Repeat steps (1) through (3) for each partner's tax year that is different from the other partners' years.
The partner's tax year that results in the lowest aggregate (total) number is the tax year that must be used by the partnership. If the calculation results in more than one tax year qualifying as the tax year with the least aggregate deferral, the partnership can choose any one of those tax years as its tax year. However, if one of the tax years that qualifies is the partnership's existing tax year, the partnership must retain that tax year.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270606

Example.(p5)

A and B each have a 50% interest in partnership P, which uses a fiscal year ending June 30. A uses the calendar year and B uses a fiscal year ending November 30. P must change its tax year to a fiscal year ending November 30 because this results in the least aggregate deferral of income to the partners, as shown in the following table.
Year End
12/31:
Year
End
Profits
Interest
Months
of
Deferral
Interest
×
Deferral
A12/310.5-0--0-
B11/300.5115.5
Total Deferral5.5
Year End
11/30:
Year
End
Profits
Interest
Months
of
Deferral
Interest
×
Deferral
A12/310.510.5
B11/300.5-0--0-
Total Deferral0.5
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270607
When determination is made.(p5)
The determination of the tax year under the least aggregate deferral rules must generally be made at the beginning of the partnership's current tax year. However, the IRS can require the partnership to use another day or period that will more accurately reflect the ownership of the partnership. This could occur, for example, if a partnership interest was transferred for the purpose of qualifying for a particular tax year.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270608
Short period return.(p5)
When a partnership changes its tax year, a short period return must be filed. The short period return covers the months between the end of the partnership's prior tax year and the beginning of its new tax year.
If a partnership changes to the tax year resulting in the least aggregate deferral, it must file a Form 1128 with the short period return showing the computations used to determine that tax year. The short period return must indicate at the top of page 1, "FILED UNDER SECTION 1.706-1."
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270609

More information.(p5)

rule
For more information about changing a partnership's tax year, and information about ruling requests, see the Instructions for Form 1128.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270610

S Corporation(p6)

rule
All S corporations, regardless of when they became an S corporation, must use a permitted tax year. A permitted tax year is any of the following. If an electing S corporation wishes to adopt a tax year other than a calendar year, it must request IRS approval using Form 2553, instead of filing Form 1128. For information about changing an S corporation's tax year and information about ruling requests, see the Instructions for Form 1128.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270611

Personal Service Corporation (PSC)(p6)

rule
A PSC must use a calendar tax year unless any of the following apply. See the Instructions for Form 1120 for general information about PSCs. For information on adopting or changing tax years for PSCs and information about ruling requests, see the Instructions for Form 1128.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270612

Section 444 Election(p6)

rule
A partnership, S corporation, electing S corporation, or PSC can elect under section 444 of the Internal Revenue Code to use a tax year other than its required tax year. Certain restrictions apply to the election. A partnership or an S corporation that makes a section 444 election must make certain required payments and a PSC must make certain distributions (discussed later). The section 444 election does not apply to any partnership, S corporation, or PSC that establishes a business purpose for a different period, explained later.
A partnership, S corporation, or PSC can make a section 444 election if it meets all the following requirements.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270613

Deferral period.(p6)

rule
The determination of the deferral period depends on whether the partnership, S corporation, or PSC is retaining its tax year or adopting or changing its tax year with a section 444 election.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270614
Retaining tax year.(p6)
Generally, a partnership, S corporation, or PSC can make a section 444 election to retain its tax year only if the deferral period of the new tax year is 3 months or less. This deferral period is the number of months between the beginning of the retained year and the close of the first required tax year.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270615
Adopting or changing tax year.(p6)
If the partnership, S corporation, or PSC is adopting or changing to a tax year other than its required year, the deferral period is the number of months from the end of the new tax year to the end of the required tax year. The IRS will allow a section 444 election only if the deferral period of the new tax year is less than the shorter of: If the partnership, S corporation, or PSC's tax year is the same as its required tax year, the deferral period is zero.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270616

Example 1.(p6)

BD Partnership uses a calendar year, which is also its required tax year. BD cannot make a section 444 election because the deferral period is zero.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270617

Example 2.(p6)

E, a newly formed partnership, began operations on December 1. E is owned by calendar year partners. E wants to make a section 444 election to adopt a September 30 tax year. E's deferral period for the tax year beginning December 1 is 3 months, the number of months between September 30 and December 31.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270618

Making the election.(p6)

rule
Make a section 444 election by filing Form 8716 with the Internal Revenue Service Center where the entity will file its tax return. Form 8716 must be filed by the earlier of:
Note.If the due date falls on a Saturday, Sunday, or legal holiday, file on the next business day.
Attach a copy of Form 8716 to Form 1065, Form 1120S, or Form 1120 for the first tax year for which the election is made.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270619

Example 1.(p6)

AB, a partnership, begins operations on September 13, 2012, and is qualified to make a section 444 election to use a September 30 tax year for its tax year beginning September 13, 2012. AB must file Form 8716 by January 15, 2013, which is the due date of the partnership's tax return for the period from September 13, 2012, to September 30, 2012.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270620

Example 2.(p7)

The facts are the same as in Example 1 except that AB begins operations on October 21, 2012. AB must file Form 8716 by March 17, 2013.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270621

Example 3.(p7)

B is a corporation that first becomes a PSC for its tax year beginning September 1, 2012. B qualifies to make a section 444 election to use a September 30 tax year for its tax year beginning September 1, 2012. B must file Form 8716 by December 17, 2012, the due date of the income tax return for the short period from September 1, 2012, to September 30, 2012.
Note.The due dates in Examples 2 and 3 are adjusted because the dates fall on a Saturday, Sunday or legal holiday.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270622

Extension of time for filing.(p7)

rule
There is an automatic extension of 12 months to make this election. See the Form 8716 instructions for more information.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270623

Terminating the election.(p7)

rule
The section 444 election remains in effect until it is terminated. If the election is terminated, another section 444 election cannot be made for any tax year.
The election ends when any of the following applies to the partnership, S corporation, or PSC.
The election will also end if either of the following events occur.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270624

Required payment for partnership or S corporation.(p7)

rule
A partnership or an S corporation must make a required payment for any tax year:
This payment represents the value of the tax deferral the owners receive by using a tax year different from the required tax year.
Form 8752, Required Payment or Refund Under Section 7519, must be filed each year the section 444 election is in effect, even if no payment is due. If the required payment is more than $500 (or the required payment for any prior year was more than $500), the payment must be made when Form 8752 is filed. If the required payment is $500 or less and no payment was required in a prior year, Form 8752 must be filed showing a zero amount.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270625
Applicable election year.(p7)
Any tax year a section 444 election is in effect, including the first year, is called an applicable election year. Form 8752 must be filed and the required payment made (or zero amount reported) by May 15th of the calendar year following the calendar year in which the applicable election year begins.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270626

Required distribution for PSC.(p7)

rule
A PSC with a section 444 election in effect must distribute certain amounts to employee-owners by December 31 of each applicable year. If it fails to make these distributions, it may be required to defer certain deductions for amounts paid to owner-employees. The amount deferred is treated as paid or incurred in the following tax year.
For information on the minimum distribution, see the instructions for Part I of Schedule H (Form 1120), Section 280H Limitations for a Personal Service Corporation (PSC).
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270627

Back-up election.(p7)

rule
A partnership, S corporation, or PSC can file a back-up section 444 election if it requests (or plans to request) permission to use a business purpose tax year, discussed later. If the request is denied, the back-up section 444 election must be activated (if the partnership, S corporation, or PSC otherwise qualifies).
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270628
Making back-up election.(p7)
The general rules for making a section 444 election, as discussed earlier, apply. When filing Form 8716, type or print "BACK-UP ELECTION" at the top of the form. However, if Form 8716 is filed on or after the date Form 1128 (or Form 2553) is filed, type or print "FORM 1128 (or FORM 2553) BACK-UP ELECTION" at the top of Form 8716.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270629
Activating election.(p7)
A partnership or S corporation activates its back-up election by filing the return required and making the required payment with Form 8752. The due date for filing Form 8752 and making the payment is the later of the following dates.
A PSC activates its back-up election by filing Form 8716 with its original or amended income tax return for the tax year in which the election is first effective and printing on the top of the income tax return, "ACTIVATING BACK-UP ELECTION."
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270630

52-53-Week Tax Year(p8)

rule
A partnership, S corporation, or PSC can use a tax year other than its required tax year if it elects a 52-53-week tax year (discussed earlier) that ends with reference to either its required tax year or a tax year elected under section 444 (discussed earlier).
A newly formed partnership, S corporation, or PSC can adopt a 52-53-week tax year ending with reference to either its required tax year or a tax year elected under section 444 without IRS approval. However, if the entity wishes to change to a 52-53-week tax year or change from a 52-53-week tax year that references a particular month to a non-52-53-week tax year that ends on the last day of that month, it must request IRS approval by filing Form 1128.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270631

Business Purpose Tax Year(p8)

rule
A partnership, S corporation, or PSC establishes the business purpose for a tax year by filing Form 1128. See the Instructions for Form 1128 for details.
taxmap/pubs/p538-000.htm#en_us_201212_publink1000270632

Corporations (Other Than S
Corporations and PSCs)(p8)

rule
A new corporation establishes its tax year when it files its first tax return. A newly reactivated corporation that has been inactive for a number of years is treated as a new taxpayer for the purpose of adopting a tax year. An S corporation or a PSC must use the required tax year rules, discussed earlier, to establish a tax year. Generally, a corporation that wants to change its tax year must obtain approval from the IRS under either the: (a) automatic approval procedures; or (b) ruling request procedures. See the Instructions for Form 1128 for details.