Changing fiscal year-end following termination of S status.Facts Excessco, Inc. was organized in 1988, and immediately elected S status. it elected to use the calendar year as its tax year. On July 1, 1995, its S status terminated. Excessco is a profitable corporation and its taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. for 1995 is as follows: 1/1/95-6/30/95 $60,000 7/1/95-9/30/95 $12,900 10/1/95-12/31/95 $24,000 Excessco projects that its taxable income will average $8,000 per month during 1996. For valid business reasons Excessco wants to change to a September 30 tax year. Issue Can Excessco change to a September 30 tax year without IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. approval? Analysis As a result of the S termination, Excessco's S termination year (calendar year 1995) is treated as an S short year (January 1 through June 30) and a C short year (July 1 through December 3 1). Except for carryover carryover n. in taxation accounting, using a tax year's deductions, business losses or credits to apply to the following year's tax return to reduce the tax liability. (See: carryback) purposes, the S and C short years are treated as two separate tax years for all purposes of the Internal Revenue Code The Internal Revenue Code is the body of law that codifies all federal tax laws, including income, estate, gift, excise, alcohol, tobacco, and employment taxes. These laws constitute title 26 of the U.S. Code (26 U.S.C.A. § 1 et seq. . The tax adviser begins by considering whether Excessco can change the end of its tax year beginning jan. 1, 1996. In most cases, a corporation must obtain IRS approval before changing its tax year by showing a business purpose for the change. method for obtaining consent is by filing Form 1128, Application to Adopt, Change, or Retain a Tax Year. However, in certain circumstances, Regs. Sec. 1.442-1(c) permits a C corporation to change its tax year without obtaining prior approval: 1. The corporation cannot have changed its tax year at any time within the previous 10 calendar years. This 10-year period ends with the calendar year that includes the beginning of the short period required to effect the change in tax year. 2. The corporation does not have a net operating loss operating loss The excess of operating expenses over revenue. As with operating income, operating losses exclude revenues and expenses from operations that are not considered a regular part of the business. Also called deficit. Compare operating income. (NOL NOL - Never Offline ) in the short period required to effect the change. 3. The annualized annualized Of or relating to a variable that has been mathematically converted to a yearly rate. Inflation and interest rates are generally annualized since it is on this basis that these two variables are ordinarily stated and compared. taxable income for the short period is 80% or more of the taxable income for the previous tax year. 4. if the corporation holds a special status (personal holding company, exempt organization, foreign corporation, Western Hemisphere Western Hemisphere Part of Earth comprising North and South America and the surrounding waters. Longitudes 20° W and 160° E are often considered its boundaries. trade corporation or China Act trade corporation), the corporation holds the same special status during the short period and the immediately preceding tax year. 5. The corporation does not attempt to elect S status effective with the beginning of the first tax year following the short period. Items 4 and 5 should not prevent a former S corporation such as Excessco from changing its tax year under Regs. Sec. 1.442-1(c). Generally, the special status corporations listed in item 4 could not have elected S status. Similarly, a former S corporation generally is prohibited from reelecting S status until the fifth tax year beginning after the tax year in which its S status terminates. If a corporation does not meet the five requirements, it may be able to obtain the Service's approval for a change in its tax year by meeting the less restrictive requirements of Rev. Proc. 92-13. Under Rev. Proc. 92-13, the corporation must file Form 1128 to obtain approval before making a change in its tax year. The tax adviser considers whether Excessco meets each of the five requirements of Regs. Sec. 1.442-1(c) for a change in its tax year. Excessco has not changed its tax year within the previous 10 calendar years ending with 1996. (The initial election of the calendar tax year does not count as a change in tax year.) Excessco does not have an NOL during its proposed C short period Jan. 1 through Sept. 30, 1996. (Excessco expects $72,000 of taxable income, assuming an average taxable income of $8,000 per month for nine months.) Excessco's annualized taxable income (calculated under the rules of Regs. Sec. 1.443-1) for the proposed C short period is $96,000 ($72,000/ 9 months X 12 months). This is more than 80% of Excessco's taxable income for its C short year [($12,900 + $24,000) X 80% = $29,520]. Excessco is not a special status corporation and cannot elect S status until its fifth tax year beginning after the tax year in which its S status terminates. Conclusion Excessco, Inc. can change its tax year beginning jan. 1, 1996 to a September 30 fiscal year because it meets all of the requirements of Regs. Sec. 1.442-1(c) for a change in fiscal year. The change requires Excessco to file a statement with the District Director and a short period return for jan. 1, 1996 through Sept. 30, 1996. In computing the tax due with this short period return, Excessco is required to annualize Annualize 1. To convert a rate of any length into a rate that reflects the rate on an annual (yearly) basis. This is most often done on rates of less than one year, and usually does not take into account the effects of compounding. its taxable income. Editor's note Editor's Note (foaled in 1993 in Kentucky) is an American thoroughbred Stallion racehorse. He was sired by 1992 U.S. Champion 2 YO Colt Forty Niner, who in turn was a son of Champion sire Mr. Prospector and out of the mare, Beware Of The Cat. Trained by D. : This case study has been adapted from PPC See Pocket PC, PowerPC and pay-per-click. PPC - PowerPC Tax Planning Tax planning Devising strategies throughout the year in order to minimize tax liability, for example, by choosing a tax filing status that is most beneficial to the taxpayer. Guide -- S Corporations, 9th Edition by Andrew R. Biebl and Gregory B. McKeen, published by Practitioners Publishing Company, Fort Worth, Tex., 1995. |
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