EA2 Study Unit 1.4 Entity Types, Methods, and Periods

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Questions and Answers

Under what circumstances would a partnership file Form 8716 instead of Form 1128 to change its tax year?

When requesting a change to a tax year end that is not a required tax year end, and also seeking to change from the cash to the accrual method of accounting.

When requesting a change to a required tax year end.

When requesting a change to a tax year end that is not a required tax year end. (correct)

When changing to a tax year end that coincides with the tax year of a newly acquired shareholder.

What type of corporation can file Form 8716 to request a change in its tax year?

Only personal service corporations (PSCs).

Only C corporations.

Only S corporations.

Partnerships, S corporations, and personal service corporations (PSCs). (correct)

A partnership currently operates on a calendar year. A corporation acquires over 50% ownership and has a fiscal year ending June 30. Can the partnership change to a June 30 year end without filing Form 8716?

No, because June 30 is not a required year end for the partnership.

Yes, as long as the partnership files Form 1128 and is denied permission by the IRS.

No, because June 30 is a required year end for the partnership. (correct)

Yes, as long as the partnership files Form 1128.

When can a short tax year occur?

When a business changes its accounting period, including the adoption of a 52- or 53-week year. (D) Signup and view all the answers

What is the name of the election that allows a partnership, S corporation, or PSC to change its tax year to a year end that is not a required year end?

Section 444 Election. (C) Signup and view all the answers

A taxpayer who does not keep books, has no annual accounting period, or has an annual accounting period other than a calendar year that does not qualify as fiscal year is required to adopt which tax year?

A calendar year (A) Signup and view all the answers

Which of the following is NOT a requirement for a fiscal year to be recognized?

The fiscal year must be a 52- or 53-week tax year ending on the same day of the week. (C) Signup and view all the answers

A taxpayer who changes their annual accounting period from a fiscal year to a calendar year is required to file a return for:

A short period of less than 12 months ending on December 31st of the year of the change. (A) Signup and view all the answers

What is the primary factor the IRS considers when granting permission to change tax years?

A substantial business purpose for the change. (A) Signup and view all the answers

Which government form is typically used to request a change in tax years?

Form 1128 (D) Signup and view all the answers

A short tax year can occur if a taxpayer:

Changes their annual accounting period. (A) Signup and view all the answers

Which of the following is NOT a valid ending date for a 52- or 53-week tax year?

The last Sunday in December. (A) Signup and view all the answers

What is the key difference between a calendar year and a fiscal year?

A fiscal year is a period of 12 months ending on the last day of a month other than December, while a calendar year is a period of 12 months ending on December 31st. (D) Signup and view all the answers

Study Notes

Tax Years

Taxpayers adopt a tax year when their first income tax return is filed.
A tax year is the annual accounting period used to record income (calendar or fiscal year), or the return period if less than 12 months.
Calendar year: 12 months ending December 31.
Fiscal year: 12 months ending on the last day of any month except December, or a 52- or 53-week period.
- A 52- or 53-week fiscal year is valid if it always ends on the same day of the week, either the last day of a calendar month or the closest day to the end of the month.
Short tax year: a period less than 12 months. Can occur if a business exists only part of the year, or changes its accounting period (e.g., from fiscal to calendar).

Short Tax Year Calculation

To calculate taxes for a short tax year, annualize the income, calculate taxes on the annualized income, then determine the short tax year's portion of the tax.

Changing Tax Years

Form 1128 is used to request a change in tax year with the IRS (typically for a substantial business purpose).
- It must be filed by the federal income tax return due date.
- A substantial business purpose is needed, not just to get a favorable tax status.
Form 8716 is used to request a change in tax year other than a required tax year (Sec. 444 election).
- It can be used without needing permission first.
- Partnerships, S corporations, and personal service corporations use this form.

Example

A partnership with a calendar year changes to a June 30 year-end after a corporation gains majority ownership and also has a June 30 tax year. Form 8716 would be used.

Important Considerations

A change in accounting method (e.g., from cash to accrual) does not cause a short tax year.
Changes in a 52- or 53-week tax year could lead to a short tax year.

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

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