The Business Master (3rd Edition)/The Business Master (3rd Edition).iso/files/legaegal/sba2/f2sba.exe/F269.SBE

Text File | 1993-04-01 | 4KB | 73 lines

@060 CHAP 8

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        │   SELECTING A FISCAL YEAR FOR TAX PURPOSES   │
        └──────────────────────────────────────────────┘

    . ABILITY TO UTILIZE FISCAL TAX YEAR TO DEFER INCOME.
Since the Tax Reform Act of 1986, most opportunities for
income tax deferral by selecting different tax year-ends
for an owner and his or her business entity have been elim-
inated, at least for partnerships, S corporations, and
"personal service corporations."  While the latter types of
entities may still make a special election to have a
September, October or November fiscal year, the election,
in effect, requires the entity to agree to give up any tax
deferral benefits that might result from using the fiscal
year, and thus will be of little benefit for tax purposes.


However, it is still possible for a C corporation that is
not a personal service corporation to elect a fiscal year
(such as a year that ends January 31) and obtain signifi-
cant tax deferral benefits by paying a relatively low base
salary through December of each year to its employee-owners.
Then, in January of 1994, for example, it can pay a large
bonus to reduce the corporation's taxable income for the
year of February 1, 1993 to January 31, 1994.  Because the
employee-owner would be on a calendar year for tax pur-
poses, the bonuses would not be taxable income to the
employee-owner for the year 1993, since not received until
January, 1994.

There are a number of different definitions of "personal
service corporations" in the Tax Reform Act of 1986, all
fairly similar but each confusingly different in certain
respects.  The type of personal service corporation that is
prohibited from using a fiscal tax year for tax deferral
purposes is one whose principal activity is the performance
of personal services, where those services are "substanti-
ally performed" by employee-owners.  Any employee who owns
any stock whatsoever is considered an "employee-owner" in
this definition, so it is difficult to avoid this classi-
fication if your corporation is engaged in a service busi-
ness of the a kind covered by the IRS's voluminous Regula-
tions on this subject.

If your C corporation is not a "personal service corpora-
tion," you may want to adopt a January 31 fiscal year for
it to obtain maximum tax deferral advantages.  However, in
some cases (where yours is a seasonal business, for exam-
ple), you may want to select a tax year that ends just be-
fore your most profitable season begins, in order to defer
taxes at the corporate level.  Thus, if you are in the
business of selling Christmas tree ornaments and do most
of your business from October through December each year,
you might choose a September 30 tax year.

    . NON-TAX REASONS WHY YOU MIGHT WANT TO CHOOSE A FISCAL
TAX YEAR.  Remember that tax considerations are not the on-
ly factors to take into account in choosing a fiscal year.
If taking an annual inventory is a major task, consider
adopting a year-end that occurs when inventory is at a low
ebb and when business is slow, if possible.  You may also
find that you will get somewhat quicker and better service
from your CPA firm for annual tax returns, audits, etc.,
if you pick a fiscal year that ends several months before
or after December, since most CPAs are at their busiest
during the frantic annual tax season from about February
to May, preparing tax returns and doing audits for their
many clients who have December year-ends.