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J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line by Barbara Weltman

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Accounting Periods

You account for your income and expenses on an annual basis. This period is called your tax year. There are 2 methods for fixing your tax year: calendar and fiscal. Under the calendar year, you use a 12-month period ending on December 31. Under the fiscal year, you use a 12-month period ending at the end of any month other than December.

You select your tax year when you first begin your business. You do not need IRS approval for your tax year; you simply use it to govern when you must file your first return. You use the same tax year thereafter. If you commence your business in the middle of the tax year you have selected, your first tax year will be short.

Example
You start your S corporation in May 2012. It uses a calendar year to report expenses. The corporation will have a short tax year ending December 31, 2012, for its first tax year. Then, for 2013, it will have a full 12-month tax year.

A short tax year may occur in the first or final year of business. For example, if you closed the doors to your business on May 1, 2012, even though you operated on a calendar year. Your final tax year is a short year because it is only 4 months. You do not have to apportion or prorate deductions for this short year because the business was not in existence for the entire year. Different rules apply if a short year results from a change in accounting period.

Seasonal Businesses

Seasonal businesses should use special care when selecting their tax year. It is often ...

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