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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.
January 2, 2012
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Article: Types of Business Taxes
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Source: http://www.irs.gov/publications/p583/ar02.html#d0e196
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