Question

Identify the different accounting periods which tax payers can choose and explain the importance of having a set accounting period from a tax perspective.

Answer 1

Taxpayers figure out the taxable income on the basis of tax year. A 'Tax Year' is annual accounting period for keeping records and reporting income and expenses. Generally Tax payers can choose following accounting periods

1. Calendar year - calendar year means 12 consecutive months beginning January 1 and ending december 31.

2. Fiscal year - fiscal year means 12 consecutive months ending on a last day of any month except December. A 52-53 week a tax year is a fiscal tax year that varies from 52 to 53 weeks in any particular year, ends always on a same day or week and ends either on the date that same weekday last occurs in the calendar month or on the day that same weekday falls that is nearest to the last day of calendar month.

• Importance of having set accounting period from a tax perspective -

Accounting period is basically helps to dictate when the tax is paid on income or gains. Accounting period begins whenever company comes with the corporation tax charge and ends without company ceasing to be within the charge. From a tax perspective, accounting period used by taxpaying individual or firm for tax purpose.

If tax payers file the tax return using calendar tax year then tax payer later begin business with sole proprietor, became partner in a partnership or became a shareholder in any corporation.

If Tax payers adopts a fiscal tax year for tax reporting purpose then he has to submit first income tax return observing that first fiscal tax year. At any time tax payers may elect to change to a calendar year. But if tax payer want to change from calendar year to fiscal year then he must get permission from IRS or meet one of the criteria outlined on from 1128, application to adopt, change tax year.