How to designate a tax year

You must figure your taxable income and file an income tax return based on an annual accounting period called a tax year. A tax year is usually 12 consecutive months.

There are two kinds of tax years:
1. Calendar tax year. A calendar tax year is 12 consecutive months beginning January 1 and ending December 31.
2. Fiscal tax year. A fiscal tax year is 12 consecutive months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month.

If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar
year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval.

You must use a calendar tax year if:
• You keep no books or records.
• You have no annual accounting period.
• Your present tax year does not qualify as a fiscal year.
• You are required to use a calendar year by a provision
of the Internal Revenue Code or the Income Tax Regulations.

For more information, see IRS Pub. 538, Accounting Periods and Methods.

For first-time filers

If you have never filed an income tax return for your business, you can adopt either a calendar tax year or a fiscal tax year. Although, some partnerships and
S corporations must use a particular tax year. See Pub. 538 for more information.

You adopt a tax year by filing your first income tax return using that tax year. You have not adopted a tax year if all you did was one or more of the following:
• Filed an application for an extension of time to file an income tax return.
• Filed an application for an employer identification number.
• Paid estimated taxes for that tax year.

To change your tax year

Once you have adopted your tax year, you may have to get IRS approval to change it. To get approval, you must file Form 1128, Application To
Adopt, Change, or Retain a Tax Year. You may have to pay a fee. For more information, see Pub. 538.