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Determining Your Tax Year and Accounting
Method
Tax Year
You must figure your taxable income and file an income tax
return based on an annual accounting period called a tax year.
A tax year is usually 12 consecutive months. There are two
kinds of tax years.
1. Calendar tax year. A calendar tax year is 12 consecutive
months beginning January 1 and ending December 31.
2. Fiscal tax year. A fiscal tax year is 12 consecutive months
ending on the last day of any month except December. A
52-53-week tax year is a fiscal tax year that varies from 52 to
53 weeks but does not have to end on the last day of a
month.
If you file your first tax return using the calendar tax year
and you later begin business as a sole proprietor, become a
partner in a partnership, or become a shareholder in an S
corporation, you must continue to use the calendar year unless
you get IRS approval to change it or are otherwise allowed to
change it without IRS approval.
You must use a calendar tax year if:
* You keep no books.
* You have no annual accounting period.
* Your present tax year does not qualify as a fiscal year.
* You are required to use a calendar year by a provision of the
Internal Revenue Code or the Income Tax Regulations.
For more information, see Publication 538, Accounting Periods
and Methods.
First-time filer. If you have never filed an income tax return,
you adopt either a calendar tax year or a fiscal tax year. You
adopt a tax year by filing your first income tax return using
that tax year. You have not adopted a tax year if you merely
did any of the following.
* Filed an application for an extension of time to file an
income tax return.
* Filed an application for an employer identification
number.
* Paid estimated taxes for that tax year.
Changing your tax year. Once you have adopted your tax year,
you may have to get IRS approval to change it. To get approval,
you must file Form 1128, Application To Adopt, Change, or
Retain a Tax Year. You may have to pay a fee. For more
information, see Publication 538.
Accounting Method
An accounting method is a set of rules used to determine when
and how income and expenses are reported. You choose an
accounting method for your business when you file your first
income tax return. There are two basic accounting methods.
1. Cash method. Under the cash method, you report income in the
tax year you receive it. You usually deduct or capitalize
expenses in the tax year you pay them.
2. Accrual method. Under an accrual method, you generally
report income in the tax year you earn it, even though you may
receive payment in a later year. You deduct or capitalize
expenses in the tax year you incur them, whether or not you pay
them that year.
For other methods, see IRS Publication 538.
If you need inventories to show income correctly, you must
generally use an accrual method of accounting for purchases and
sales. Inventories include goods held for sale in the normal
course of business. They also include raw materials and
supplies that will physically become a part of merchandise
intended for sale. Inventories are explained in IRS Publication
538.
Tip
Certain small business taxpayers can use the cash method of
accounting and can also account for inventoriable items as
materials and supplies that are not incidental. For more
information, see IRS Publication 538.
You must use the same accounting method to figure your taxable
income and to keep your books. Also, you must use an accounting
method that clearly shows your income. In general, any
accounting method that consistently uses accounting principles
suitable for your trade or business clearly shows income. An
accounting method clearly shows income only if it treats all
items of gross income and expense the same from year to
year.
More than one business. When you own more than one business,
you can use a different accounting method for each business if
the method you use for each clearly shows your income. You must
keep a complete and separate set of books and records for each
business.
Changing your method of accounting. Once you have set up your
accounting method, you must generally get IRS approval before
you can change to another method. A change in accounting method
not only includes a change in your overall system of
accounting, but also a change in the treatment of any material
item. For examples of changes that require approval and
information on how to get approval for the change, see
Publication 538.
December 12, 2008
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Source:
http://www.irs.gov/publications/p583/ar02.html#d0e196
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