Paystubmakr.com team is back with taxation articles, this time about the tax year rule for S Corporation.
S corporation taxable year rule
The term “tax year” is the annual accounting period that is used for keeping records and reporting income and expenses. It is either a calendar year or a fiscal year. Generally, an S corporation must use the permitted tax year. If, however, it can persuade the IRS that there is a business purpose for the use of a different period, the different period may be allowed (§1378). Permitted year means a taxable year which:
(i) Is a year ending December 31 st, or
(ii) Any other accounting period that a corporation establishes a business purpose to the satisfaction of the Secretary. For this subsection, any deferral of income to shareholders shall not be treated as a business purpose (§1378(b)).
A greedy tax collector
Also, an S corporation may elect under §444 to have a tax year other than the permitted tax year. Some restrictions apply to a §444 election. A corporation electing S corporation status does not need IRS approval to choose a calendar year as its tax year. An electing S corporation should use Form 2553 to request a tax year other than a calendar year.
A substantial business purpose exists if the corporation’s requested year is a natural business year, or if the requested year satisfies an ownership tax year test. If neither of these tests applies, the corporation can establish a business purpose.
Both tax factors and non-tax factors must be considered to determine whether you have a substantial business purpose. A non-tax factor for a substantial business purpose is the annual cycle of your business activity. Significant weight is given to tax factors. A prime consideration in permitting the use of a different tax year is whether it would create a substantial distortion of income. Examples of distortion of income are:
(i) Deferring an essential part of the revenue, or shifting a significant portion of deductions, from one year to another to reduce tax liability,
(ii) Causing a similar deferral or moving for any other person, such as a shareholder, and
(iii) Creating a short period in which there is a substantial net operating loss.
Change of Tax Year
An S corporation should file Form 1128, Application to Adopt, Change, or Retain a Tax Year, to apply for permission to change its tax year to a year other than a year ending December 31. This form should be filed by the 15th day of the second calendar month after the close of the short tax year. This short tax year begins on the first day after the end of the corporation’s present taxation year and ends one day before the opening date of its new tax year.
The due date for the tax is a sad day.
A domestic corporation must file Form 1120S if:
(1) It should be taxed as an S corporation,
(2) The IRS accepted the election, and
(3) The election remains in effect.
If an S corporation’s income tax return (Form No. 1120S) is made on a calendar year basis, the return must be filed by March 15 following the close of the tax year. If an S corporation is permitted to use a fiscal year as its tax year, its return must be filed by the 15th day of the 3rd month following the close of its fiscal year.
Tax box, the tax collection.
An S corporation will receive an automatic 6-month extension to file a return by submitting an application for extension on Form 7004, Application for Automatic Extension of Time to File Corporation Income Tax Return. This form is filed with the Internal Revenue Service Center where the S corporation must file its income tax return. The IRS may terminate this extension at any time by mailing a termination notice to the corporation. Form 7004 must be filed by the due date of the S corporation’s income tax return. Any automatic extension of time for filing an S corporation’s income tax return will not extend the time for payment of any tax due as shown on the return.
If an S corporation does not file its return by the due date, including extensions, and if it cannot show reasonable cause, a delinquency penalty of 5% of the tax due will apply if the delinquency is for not more than one month. An additional 5% is imposed for each additional month or part of a month during which the delinquency continues. The penalty is limited to a total of 25%.
The tax due is the tax liability that would be shown on a return minus credits and any tax payments made before the due date. The late payment penalty reduces the penalty for late filing. If the return If the return is not filed within 60 days after the due date, including extensions, the penalty for late filing will be at least $100 or the balance of tax due, whichever is less. This will not apply if reasonable cause is shown.
An S corporation that wishes to avoid a penalty for late filing or payment must be able to show reasonable cause. This should be done by filing with the Director of the Service Center where the return must be filed a statement of the facts establishing reasonable cause for failure to file a return or pay the tax on time. The statement must also contain a declaration that it has been made under the penalties of perjury.
The Tax Collector did not use check stubs
An S corporation must furnish a copy of Schedule K-1, Shareholder’s Share of Income, Credits, Deductions, etc., or a substitute Schedule K-1, to each person or entity that was a shareholder during the year. Not furnishing this form or a substitute by the day Form 1120S was filed, or not including all the required information, or including incorrect information, may result in a $50 penalty for each form not furnished, incomplete, or incorrect. The total penalty, however, cannot be more than $100,000 for the calendar year. #9-56
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