Tax Year

Gregory J. Cook, EA, CPA+ Accredited Tax Advisor Past President Alabama Society of Enrolled Agents Past President Alabama Association of Accountants

You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. A tax year is usually 12 consecutive months. There are two kinds of tax years.

(1) CALENDAR TAX YEAR - This is a period of 12 consecutive months beginning January 1 and ending December 31.

(2) FISCAL TAX YEAR - This is a period of 12 consecutive months ending on the last day of any month except December or a 52- or 53-week period ending on a specific day of the week occurring either in the last week or nearest the last day of a specific month.

If you operate a business as a sole proprietor, the tax year for your business must be the same as your individual tax year. Special rules apply to S corporations and partnerships. For more information, see Publication 538, ACCOUNTING PERIODS AND METHODS.

FIRST-TIME FILER - If you have never filed an income tax return, you can choose either a calendar tax year or a fiscal tax year. You must choose a tax year by the time set by law, not including extensions, for filing your first return. You must use a calendar tax year if you have inadequate records or you have no accounting period, or your annual accounting period does not qualify as a fiscal year.

CHANGING YOUR TAX YEAR - Once you have chosen your tax year, you may have to get IRS approval to change it. To get approval, you must file FORM 1128, APPLICATION TO ADOPT, CHANGE, OR RETAIN A TAX YEAR. You may have to pay a fee.

You must figure your taxable income on the basis of a tax year and file an income tax return. 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. The tax years you can use are:

Calendar year - A calendar tax year is 12 consecutive months beginning January 1 and ending December 31.
Fiscal year - A fiscal tax year is 12 consecutive months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month.

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 and the Income Tax Regulations. You have not adopted a tax year if you merely did any of the following.

Filed an application for an extension of time to file an income tax return.
Filed an application for an employer identification number.
Paid estimated taxes for that tax 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 get IRS approval to change it or are otherwise allowed to change it without IRS approval.

Generally, anyone can adopt the calendar year. However, if any of the following apply, you must adopt the calendar year.

You keep no books.
You have no annual accounting period.
Your present tax year does not qualify as a fiscal year.
You are required to use a calendar year by a provision of the Internal
Revenue Code or the Income Tax Regulations.
Short Tax Year

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):

Are not in existence for an entire tax year, or
Change your accounting period.
Tax on a short period tax return is figured differently for each situation.

Not in Existence Entire Year

Even if you (a taxable entity) were not in existence for the entire year, a tax return is required for the time you were 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.

For more information, see Publication 538, Accounting Periods and Methods.