Accounting Period

A corporation must figure its income on the basis of a tax year. A tax year is the annual accounting period a corporation uses to keep its records and report its income and expenses.

An S corporation must use one of the following tax years.

• A tax year ending December 31.

• A natural business year.

• An ownership tax year.

• A tax year elected under section 444.

• A 52-53-week tax year that ends with reference to a year listed above.

• Any other tax year (including a 52-53-week tax year) for which the corporation establishes a business purpose.

A new S corporation must use Form 2553 to elect a tax year. To later change the corporation’s tax year, see Form 1128, Application To Adopt, Change, or Retain a Tax Year, and its instructions (unless the corporation is making an election under section 444, discussed next).

Electing a tax year under section 444. Under the provisions of section 444, an S corporation can elect to have a tax year other than a required year, but only if the deferral period of the tax year isn’t longer than the shorter of 3 months or the deferral period of the tax year being changed. This election is made by filing Form 8716, Election To Have a Tax Year Other Than a Required Tax Year.

An S corporation may not make or continue an election under section 444 if it is a member of a tiered structure, other than a tiered structure that consists entirely of partnerships and S corporations that have the same tax year. For the S corporation to have a section 444 election in effect, it must make the payments required by section 7519. See Form 8752, Required Payment or Refund Under Section 7519.

A section 444 election ends if an S corporation:

• Changes its accounting period to a calendar year or some other permitted year,

• Is penalized for willfully failing to comply with the requirements of section 7519, or

• Terminates its S election (unless it immediately becomes a personal service corporation).

• Special rules apply to long-term contracts. See section 460.

• Generally, dealers in securities must use the mark-to-market accounting method. Dealers in commodities and traders in securities and commodities can elect to use the mark-to-market accounting method. See section 475.

Small business taxpayer. A small business taxpayer is a taxpayer that (a) has average annual gross receipts of $31 million or less for the 3 prior tax years under the gross receipts test of section 448(c), and (b) isn’t a tax shelter (as defined in section 448(d)(3)).

Change in accounting method. Generally, the corporation must get IRS consent to change either an overall method of accounting or the accounting treatment of any material item for income tax purposes. To obtain consent, the corporation must generally file Form 3115, Application for Change in Accounting Method, during the tax year for which the change is requested. See the Instructions for Form 3115 and Pub. 538, Accounting Periods and Methods, for more information and exceptions. Also,

If the termination results in a short tax year, enter at the top of the first page of Form 1120-S for the short tax year, “SECTION 444 ELECTION TERMINATED.”