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October 21, 2020


When must a business use the calendar year for tax purposes?

During the formation of a Texas business, the owner or owners will have numerous decisions to make that will affect the business for at least the foreseeable future. For instance, decisions regarding taxes could have a significant impact on the future success of the business. Even though the IRS may allow some entities to choose what kind of tax year they want to use, some must use the calendar year.

Under the following circumstances, the IRS says that a business must use the calendar year for tax purposes:

  • After filing a first return using the calendar year, then becoming a shareholder of a Sub S corporation, a partner in a partnership or a sole proprietorship
  • The current tax year does not meet the requirements of a fiscal year
  • The business has no annual accounting period or does not maintain records or books

Of course, some businesses must make this election because of a provision in the Income Tax Regulations or a specific Internal Revenue Code provision. It may be possible to make another election under certain circumstances, but before that can happen, a business falling under one or more of the above may have to meet other established criteria.

This is one decision that needs to be made correctly the first time since it could be difficult to change later. Knowing what decision will best benefit a particular business can be problematic. If new Texas business owners wonder why they would choose anything other than a calendar year for tax purposes, it would probably benefit them greatly to discuss the pros and cons with an experienced tax attorney.