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@060 CHAP 8
┌──────────────────────────────────────────────┐
│ SELECTING A FISCAL YEAR FOR TAX PURPOSES │
└──────────────────────────────────────────────┘
. ABILITY TO UTILIZE FISCAL TAX YEAR TO DEFER INCOME. Since the Tax
Reform Act of 1986, most opportunities for income tax deferral by sel-
ecting different tax year-ends for an owner and his or her business
entity have been eliminated, at least for partnerships, S corporations,
and "personal service corporations." While the latter types of enti-
ties may still make a special election to have a September, October or
November fiscal year, the election, in effect, requires the entity to
agree to give up any tax deferral benefits that might result from using
the fiscal year, and thus will be of little benefit for tax purposes.
However, it is still possible for a C corporation that is not a per-
sonal service corporation to elect a fiscal year (such as a year that
ends January 31) and obtain significant tax deferral benefits by paying
a relatively low base salary through December of each year to its
employee-owners. Then, in January of 1993, for example, it can pay a
large bonus to reduce the corporation's taxable income for the year of
February 1, 1992 to January 31, 1993. Since the employee-owner would
be on a calendar year for tax purposes, the bonuses would not be tax-
able income to the employee-owner for the year 1992, since received in
January, 1993.
There are a number of different definitions of "personal service
corporations" in the Tax Reform Act of 1986, all fairly similar but
each confusingly different in certain respects. The type of personal
service corporation that is prohibited from using a fiscal tax year
for tax deferral purposes is one whose principal activity is the per-
formance of personal services, where those services are "substantially
performed" by employee-owners. Any employee who owns any stock what-
soever is considered an "employee-owner" in this definition, so it is
difficult to avoid this classification if your corporation is engaged
in a service business of the a kind covered by the IRS's voluminous
Regulations on this subject.
If your C corporation is not a "personal service corporation," you may
want to adopt a January 31 fiscal year for it to obtain maximum tax
deferral advantages. However, in some cases (where yours is a seasonal
business, for example), you may want to select a tax year that ends
just before your most profitable season begins, in order to defer
taxes at the corporate level. Thus, if you are in the business of
selling Christmas tree ornaments and do most of your business from
October through December each year, you might choose a September 30
tax year.
. NON-TAX REASONS WHY YOU MIGHT WANT TO CHOOSE A FISCAL TAX YEAR.
Remember that tax considerations are not the only factors to take into
account in choosing a fiscal year. If taking an annual inventory is a
major task, consider adopting a year-end that occurs when inventory is
at a low ebb and when business is slow, if possible. You may also find
that you will get somewhat quicker and better service from your CPA
firm for annual tax returns, audits, etc., if you pick a fiscal year
that ends several months before or after December, since most CPAs
are at their busiest during the frantic annual tax season from about
February to May, preparing tax returns and doing audits for their many
clients who have December year-ends.