Question

Discuss the requirements for the tax year- end and accounting methods that may be required/adopted by S Corporations.

Answer 1

A required tax year refers to a tax year which is required under the income tax regulations and Internal Revenue Code. Partnerships, personal service corporations (PSC) and S corporations have to use a required tax year. If an entity does not have to use the required tax year then should seek an approval from IRS to use another permitted year; or makes an election under Section 444 to inform that required tax year is not used.

The required tax year rules for a partnership are as

-- Using a calendar year

-- Apply for a fiscal year for IRS approval

-- S Corp may use Sec. 444 to elect a fiscal year

-- Application for a business-goal fiscal year established by circumstances and facts

To file tax return to the S Corp will be required to report the accounting method. As an S corporation it may choose either one of the two basic accounting methods: cash and accrual; regardless of the company's size or the amount of it's income. The special methods are allowed in specific cases. Under accrual system of accounting revenues are recognized when earned and expenses are recognized when incurred or charged; and under the cash method income is to be recognized when cash is received, thus the taxpayers for tax purposes will be reporting income when the income is received.