Changing a Tax Year End - What's to Know
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Changing your business’s tax year end—also known as your annual accounting period—can be a strategic move, but it’s not as simple as picking a new date and moving forward. The IRS has established rules, procedures, and limitations that vary depending on your business structure. Here’s a comprehensive guide to what’s required, the process, and special considerations for C-corporations, S-corporations, partnerships, and sole proprietorships.
What Is a Tax Year?
A tax year is the annual accounting period for keeping records and reporting income and expenses. Most businesses use either:
Calendar year: January 1 to December 31
Fiscal year: 12 consecutive months ending on the last day of any month except December
52-53 week year: A fiscal year that varies from 52 to 53 weeks but does not have to end on the last day of a month.
Who Can Change Their Tax Year End?
Generally, any business can request to change its tax year, but the process and requirements differ based on the entity type. Some entities have a “required tax year” under the Internal Revenue Code and Treasury Regulations, which limits their flexibility.
C-Corporations
Flexibility: C-corporations can generally choose any tax year, unless they are subject to special rules (e.g., personal service corporations).
Process: To change the tax year, a C-corporation must file Form 1128, Application to Adopt, Change, or Retain a Tax Year, and obtain IRS approval unless they qualify for automatic approval under certain revenue procedures (e.g., Rev. Proc. 2006-45).
Automatic Approval: Available if the corporation meets specific requirements, such as not having changed its tax year in the last 48 months and not being under examination.
Business Purpose: If not eligible for automatic approval, the corporation must establish a valid business purpose for the change.
S-Corporations
Required Tax Year: S-corporations must generally use a calendar year unless they can establish a business purpose for a different year or make a Section 444 election (which allows a limited deferral period).
Process: To change the tax year, S-corporations must file Form 1128 and, if requesting a non-calendar year, demonstrate a business purpose or make a Section 444 election by filing Form 8716.
Limitations: Deferral of income to shareholders is not considered a valid business purpose.
Partnerships
Required Tax Year: Partnerships must generally use the tax year of the majority interest partners, the principal partners, or the year that results in the least aggregate deferral of income to partners.
Process: Partnerships must file Form 1128 to change their tax year, unless they qualify for automatic approval (e.g., changing to a required tax year).
Section 444 Election: Partnerships can elect a tax year other than the required year if the deferral period is three months or less but must make required payments to the IRS.
Sole Proprietorships
Flexibility: Sole proprietors generally use a calendar year but may adopt a fiscal year if they keep their books and records on that basis.
Process: To change the tax year, a sole proprietor must file Form 1128 and obtain IRS approval, unless an exception applies.
The Process: How to Change Your Tax Year
Determine Eligibility
Review whether your business is eligible for automatic approval or must request a ruling.
Check for any required tax year rules that apply to your entity type.
File Form 1128
Most businesses must file Form 1128 to request a change in tax year.
The form must be filed by the due date (not including extensions) of the federal income tax return for the first effective year (the short period required to effect the change).
Automatic Approval vs. Ruling Request
Automatic Approval: If you qualify under the relevant revenue procedure, complete Parts I and II of Form 1128. No user fee is required.
Ruling Request: If you do not qualify for automatic approval, complete Part III and pay a user fee. You must establish a business purpose for the change.
Short Period Return
When changing your tax year, you must file a short period tax return for the period between the end of your old tax year and the beginning of your new tax year. Income for the short period is annualized for tax calculation purposes.
IRS Review and Approval
The IRS will review your application and notify you of approval or denial. If denied, you may request relief under certain circumstances.
Special Considerations and Limitations
Business Purpose Requirement: For most entities (except C-corporations in some cases), a valid business purpose is required to change to a non-required tax year. Administrative convenience, hiring patterns, or financial reporting needs are generally not sufficient.
Section 444 Election: Partnerships, S-corporations, and PSCs can elect a tax year with a deferral period of up to three months but must make required payments to the IRS.
Consolidated Groups: The common parent files one Form 1128 for the group, and all members must meet the requirements for the change.
Entities Under Examination: If your business is under IRS examination, special procedures and consents may be required.
No Retroactive Changes: Changes in tax year cannot be made retroactively unless specifically authorized by the IRS.
Special Rules for Certain Exempt and Governmental Entities: Some entities, such as those making elective payment elections under §6417, have unique procedures for changing their tax year (see Rev. Proc. 2025-6).
Is It Possible for Every Type of Business?
C-Corporations: Generally yes, subject to IRS approval and required procedures.
S-Corporations: Only if they can establish a business purpose or make a Section 444 election.
Partnerships: Only if they can establish a business purpose, make a Section 444 election, or are changing to a required tax year.
Sole Proprietorships: Generally yes, but must follow IRS procedures and may need to establish a business purpose.
Key Takeaways
Changing your tax year end is possible, but not always simple.
The process requires IRS approval, usually via Form 1128.
Special rules and limitations apply to S-corporations, partnerships, and entities with a required tax year.
Automatic approval is available in some cases; otherwise, a business purpose must be established.
Always consult the latest IRS guidance and consider working with a tax professional to ensure compliance.
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