Short Tax Year

A short tax year is a fiscal or calendar tax year that is less than twelve months in length. Short tax years occur either when a business is started or a business’ accounting period changes. Short tax years occur only for businesses, never for individual taxpayers, because individuals must file on a calendar-year basis and do not have the option of choosing a fiscal year.

A tax year is an annual accounting period for keeping records and reporting income and expenses. 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 twelve consecutive months beginning January 1 and ending December 31. The fiscal year is any twelve consecutive month period that ends on any day of any month, except the last day of December. When a company’s tax year is shorter than twelve months, it is simply referred to as a short tax year.

An annual accounting period does not include a short tax year which occurs when a business has not existed for a full tax year or when a business changes its accounting period. If a business begins in the middle of May, and the business owner wishes 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 that in which the business was established. Likewise, a business that started and went out of business within twelve 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 that year. 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.

A short tax year can also occur when a business decides to change its taxable year, a change that requires the approval of the Internal Revenue Service (IRS) after the entity files 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, a business that reports income from June to June every year decides to change its fiscal year to begin in October. Therefore, a short tax year from June to October must be reported.