S corporation tax year rules.

• Author: Ellentuck, Albert B.

[ILLUSTRATION OMITTED]

THE USE OF A FISCAL YEAR DEFERS REPORTING of the S corporation's passthrough income to the shareholders and facilitates year-end tax planning. The shareholders can determine their income from the S corporation before their individual calendar tax year ends. This allows them to prepare for the effects of passthrough from the S corporation and implement any appropriate tax planning strategies before the end of their tax years. Further, a fiscal year may result in the deferral of income.

Using a Permitted Year

The S corporation tax-year rules, similar to those governing partnerships, state that an S corporation must use a permitted year. Under Sec. 1378(b), a permitted year is a tax year that (1) ends on December 31 or (2) is any other accounting period for which the corporation establishes a business purpose to the satisfaction of the IRS.

A business-purpose fiscal year may be automatically established if it is.

1. A natural business year because it meets a 25% mechanical test;

2. An ownership tax year because it coincides with the tax year used by shareholders holding more than 50% of the corporation's stock on the first day of the requested tax year; or

3. A certain 52-53-week year. If the requested business-purpose tax year cannot be established under the automatic approval provisions, it must be established based on facts and circumstances. As an alternative to using a calendar year or a business-purpose fiscal year, the corporation may elect a fiscal year if it meets the requirements of Sec. 444.

   Choosing a Fiscal Year When the Corporation Elects S Status

   When a corporation elects S status by filing a properly completed Form 2553, Election by a Small Business Corporation (Under Section 1362 of the Internal Revenue Code), it simultaneously applies for a tax year. The entry of a month and day in the "selected tax year" space provided on Form 2553 is a formal request for a specific year that ends on the last day of that month.

   A company electing to be an S corporation can:

1. Use a calendar year;

2. Make the Sec. 444 election and use an acceptable fiscal year;

3. Apply for a fiscal year that will be approved automatically; or

4. Apply for a business-purpose fiscal year established by facts and circumstances.

   When a C corporation elects S status, the S corporation's first tax year begins on the first day following the calendar or fiscal tax year of the electing C corporation.

   Changing the Year of an Existing S Corporation

   An...