EA2 Study Unit 1.4 Entity Types, Methods, and Periods - Accounting Periods - Questions

IRS Approval and Fiscal Year Adoption

• Taxpayers must get IRS approval to adopt a fiscal tax year for their first federal income tax return.
• A completed Form 1128 must be attached to the fiscal year-basis income tax return.
• Taxpayers should file a short-period return if needed.
• Maintain accurate books and records for the entire tax year, and report all income and expenses accordingly.

Short Period Return Calculation

• Mr. Heston's adjusted gross income for the first 6 months of 2023 was $34,500.
• Itemized deductions were $15,800.
• His annualized income was calculated by annualizing his modified gross income, which is adjusted gross income minus deductions.
• Annualized short period income was calculated to be $37,400.

Acceptable Tax Year

• A tax year consisting of 12 consecutive months ending on the last day of the month is acceptable.
• Short tax years that occur due to business changes to the accounting period are acceptable.
• 52- or 53-week tax years are acceptable. An accounting period that changes to accrual method does not warrant a short year.

Changing Required Tax Year

• Form 1128 is for requesting a change in tax years.
• Permission is granted if there is a substantial business purpose behind the change.
• Partnerships, S-corporations, and PSCs can change their tax year and use Form 8716.

Changing Tax Year Status from S Corp to C Corp

• An S corporation's year-end must match that of the corporation's revenue streams and accounting methods.
• If the corporation stays on a June 30 year-end, and switches from S-corp to C-corp, the correct approach is to maintain a June 30 year-end and using accrual method.

Taxable Income for Short Tax Year

• Mr. Jones' adjusted gross income was $40,000, and itemized deductions were $16,000 for the 6-month period from January 1 through June 30, 2023.
• His taxable income for the short tax year was determined by subtracting itemized deductions from his adjusted gross income for the short tax period, then annualized by multiplying the number by 12 months, dividing by duration in months.
• The annualized income for Mr. Jones' short tax year return was $48,000.

Entities Adopting Calendar Tax Year

• Taxpayers who keep no books or records must use the calendar year.
• Tax shelters must use the calendar year.

End of Tax Year

• The end of a tax year cannot be April 15th.
• Acceptable ends of tax years include the last day of any month other than December and 52- to 53-week periods.

Tax Year Eligibility

• A fiscal year (other than a 52- to 53-week tax year) that ends on any day other than the last day of the month is not an acceptable tax year.
• 52- to 53-week tax years are acceptable if they end on the same day of the week each year.
• Short tax years that occur due to accounting period changes are acceptable.
• Taxpayers that have not been in business for an entire year can have a short year.

Entity with Most Flexibility in Choosing Accounting Period

• C corporations have the most flexibility in choosing an accounting period.
• Other entities, such as S-corporations, partnerships, and personal service corporations, have more restricted options.