Explain the rules regarding the accounting periods available to corporate taxpayers.
What will be an ideal response?
In general, a corporate taxpayer may select a calendar year or a fiscal year for tax return reporting purposes. A newly formed corporation generally can select its initial reporting period without having to obtain IRS consent. However, certain types of corporate taxpayers are subject to restrictions on their reporting period. In general, personal service corporations (PSCs) and S corporations are required to use the calendar year for tax reporting. Exceptions to this rule apply, and a fiscal year can be elected by a PSC (or S corporation) under any of the following conditions: ?
| • | A business purpose for the year can be demonstrated. |
| • | The PSC tax year results in a deferral of not more than three months’ income. An election under § 444 is required, and the PSC will be subject to the deduction limitations of § 280H. The corporation must pay the shareholder/employee’s salary during the portion of the calendar year after the close of the fiscal year. In addition, the salary for that period must be at least proportionate to the employee’s salary for the fiscal year. (For an S corporation electing a § 444 deferral, the required payments provision of § 7519 must be satisfied. See Chapter 12.) |
| • | The PSC (or S corporation) retained the same year that was used for its fiscal year ending 1987, provided an election was made under § 444 and subject to the deduction limitations of § 280H (or § 7519, in the case of an S corporation). |
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