Fiscal-year individuals.

• Author: Hamill, James R.
• Position: Accounting periods

Although virtually all individual taxpayers file on a calendar-year basis, an individual may adopt a fiscal year. Under Temp. Regs. Sec. 1.441-1T, an individual adopts a tax year when he is first required to file a return and he may adopt any tax year, provided it matches his annual accounting period and meets the requirement that books of account be maintained for that accounting period. IRS consent to adopt a fiscal year is required only if the individual later wants to change the selected tax year. Once adopted, the fiscal year applies to any business operated as a proprietorship, including operations conducted through a single-member limited liability company that does not elect association status.

A fiscal year may minimize workload compression and cashflow concerns for proprietorships. For example, an internal bookkeeping function may be better performed without the pressure to simultaneously prepare payroll tax and information returns, or a retail operation may find a year-end that does not coincide with the busiest shopping time of the year to be desirable. A fiscal year may also better match the proprietor's liquidity with required estimated tax payment dates. Under Sec. 706(b) majority or principal partner rules, a fiscal-year individual may be able to favorably influence the required tax years of a partnership in which he is an owner. Minority or nonprincipal partners may therefore be able to defer income by admitting a fiscal-year individual as the majority partner or the sole principal partner. Because a partner cannot (without the Service's consent) change from a calendar to a fiscal year to affect the partnership's required tax year, the fiscal-year individual must have adopted his tax year before being admitted to the partnership (which would generally require adoption on the individual's initial tax filing). The opportunity to select a fiscal year on the first tax return filed by an individual will likely be lost unless a parent or a tax adviser suggests it as an option for a young person filing his first return. The decision to elect a fiscal year should not be made without considering the requirements to maintain accounting records on a fiscal-year basis and to later (if desired) change to a calendar year.

Sec. 441(c) defines an annual accounting period to be the period for which an individual regularly computes his income in keeping his books. Because the law does not require individuals to maintain books and records, it...