Question

Discuss the requirements for the tax year-end and accounting methods that may be required/adopted by Partnerships.

Answer 1

A required tax year refers to a tax year which is required under the income tax regulations and Internal Revenue Code. Partnerships, personal service corporations (PSC) and S corporations have to use a required tax year. If an entity does not have to use the required tax year then should seek an approval from IRS to use another permitted year; or makes an election under Section 444 to inform that required tax year is not used.

The required tax year rules for a partnership are as

-- When one or more partners having the similar tax year own a maximum interest (usually higher than 50%) in the capital and profits of the partnership it should use the tax year of those partners

-- When there is no majority interest tax year, it should use the tax year of all its principal partners (those who holds a 5% or more interest in the capital and profits of the partnership)

-- When there is no majority interest tax year, the principal partners have different tax year, the partnership may use a tax year which leads to the least aggregate income deferral to the partners

To file tax return to the IRS partnership will be required to report the accounting method, For tax purposes the two basic accounting methods are cash and accrual. Under accrual system of accounting revenues are recognized when earned and expenses are recognized when incurred or charged; and under the cash method income is to be recognized when cash is received, thus the taxpayers for tax purposes will be reporting income when the income is received. The certain types of businesses owners may use special methods of accounting under the tax law. These include builders and contractors, farmers, and owners of business that are receiving income under long-term contracts