What Is a Short Tax Year?
A short tax year is a fiscal or calendar tax year that is less than 12 months in length. Individual taxpayers usually file on a calendar-year basis, so the short tax year applies primarily to businesses. It may occur when a business starts up in mid-year or changes its accounting period.
Understanding the Short Tax Year
For any business, accounting is not just a process of recording expenses and receipts. It's a process for reporting those expenses and receipts to the Internal Revenue Service (IRS) to back up the numbers on the business' tax returns.
- A business may report a short tax year when it first opens or when it changes its accounting period.
- Individuals do not usually have to worry about a short tax year.
- A business can change its taxable year using IRS Form 1128.
A business can use either the calendar year or fiscal year as its tax year for income reporting. A calendar tax year refers to the 12 consecutive months beginning January 1 and ending December 31. The fiscal year is any 12 consecutive months that end on any day of any month except the last day of December. When a company’s tax year is shorter than 12 months, it is referred to as a short tax year.
An annual accounting period does not include a short tax year which occurs when a business has only existed for part of a tax year or when a business changes its accounting period. If a business opens in the middle of May, and the business owner prefers to file on a calendar-year basis, the business will have a short tax year, with income and expenses for only 7½ months reported on Form 1040.
A similar situation would occur if the business owner wished to use a fiscal year that began in a different month than the one in which the business was established. Even a business that started up and then went out of business within 12 months must still have its tax return for the short tax year reflect income and expenses for the period of time it was in operation.
Requirements for filing the return and figuring the tax are generally the same as the requirements for a return for a full tax year ending on the last day of the short tax year.
The Taxable Year
A short tax year can also occur when a business decides to change its taxable year. This change requires the approval of the IRS and a filing using Form 1128. In this case, the short tax period begins on the first day after the close of the old tax year and ends on the day before the first day of the new tax year.
For example, say a business that has reported income from June to June every year decides to change its fiscal year to begin in October. A short tax year from June to October must be reported for the transition period.