649 / What is an individual’s “taxable year”?

Although most taxpayers report tax liability based on a calendar year, a taxpayer may choose to report tax liability based on a fiscal year. However, whichever year is used, it must generally correspond to the taxpayer’s accounting period.² Thus, if the taxpayer’s accounting period is based on a fiscal year, tax liability cannot be determined by the calendar year. But if the taxpayer has no accounting period and does not keep books, a calendar year must be used.³ Once a tax year has been chosen, the taxpayer cannot change from a calendar year to a fiscal year or vice versa without the permission of the Internal Revenue Service.⁴

A principal partner must use the same tax year as the partnership and cannot change to a different tax year unless it establishes to the IRS that there is a business purpose for doing so.⁵ Under certain circumstances, partnerships, S corporations, and personal service corporations must use the calendar year for computing income tax liability.⁶

A short period income tax return must be filed if (1) the taxpayer changes an annual accounting period, or if (2) the taxpayer has been in existence for only part of a taxable year.⁷ For this purpose, a short period is considered a “taxable year.”⁸