CHAPTER 2 Tax Year and Accounting Methods

  1. Accounting Periods
  2. Accounting Methods
  3. Uniform Capitalization Rules

Once you select your form of business organization, you must decide how you will report your income. There are 2 key decisions you must make: What is the time frame for calculating your income and deductions (called the tax year or accounting period), and what are the rules that you will follow to calculate your income and deductions (called the accounting method). In some cases, as you will see, your form of business organization restricts you to an accounting period or accounting method. In other cases, however, you can choose which method is best for your business. Depending upon circumstances, you may want to need to change your accounting method. Sometimes making a change is easy, with automatic procedures; other situations require IRS consent, as you will see later in this chapter.

For a further discussion on tax years and accounting methods, see IRS Publication 538, Accounting Periods and Methods. Inventory rules are discussed in Chapter 4.

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 ...

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