AOL File Library: 2,401 to 2,500/aol-file-protocol-4400-2401-to-2500.zip/AOLDLs/PC Business Library/Small Business Advisor/SBA964.exe/F269.SBE

Text File | 1996-08-23 | 4KB | 85 lines

@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 selecting 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 entities 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 personal 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 1997, for example, it can pay a large bonus
to reduce the corporation's taxable income for the year of
February 1, 1996 to January 31, 1997.

Because the employee-owner would be on a calendar year for
tax purposes, the bonuses would not be taxable income to
the employee-owner for the year 1996, since not received
until January, 1997.

@IF117xx]PLANNING NOTE FOR @NAME:
@IF117xx]-----------------------------------------------------------
@IF117xx]Your business is organized as a C corporation, and thus may
@IF117xx]be able to take advantage of such status to elect a fiscal
@IF117xx]year for tax purposes.  However, to do so, you will have to
@IF117xx]determine that your corporation is not a "personal services
@IF117xx]corporation," as discussed below.  (Use this program's
@IF117xx]"consultation" feature to determine whether or not your
@IF117xx]is a "personal services corporation.")
@IF117xx]-----------------------------------------------------------
@IF117xx]
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 performance
of personal services, where those services are "substantially
performed" by employee-owners.  Any employee who owns any
stock whatsoever 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 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.