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 and there are two kinds:
- Calendar Tax Year. A calendar tax year is 12 consecutive months beginning January 1 and ending December 31.
- Fiscal Tax Year. A fiscal tax year is 12 consecutive months ending on the last day of any months 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
- Your are required to use a calendar year by a provision of the IRS code
Most people use the Calendar Tax Year method. There are restrictions on who can use the Fiscal Year methods, which are beyond the scope of this course. For more information, see IRS 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 a return
- Filed an application for an EIN
- Paid estimated taxes for that tax year
Changing your tax year. Once you have adopted your tax year, you have to get IRS approval to change it and have a compelling financial reason to do it. To get approval, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year.