What Is a Section 444 Election and How Does It Work?

A Section 444 election allows certain businesses to choose a fiscal tax year instead of the generally mandated calendar year. This election, governed by Section 444 of the Internal Revenue Code, provides flexibility for entities whose business cycle does not align with a standard January to December period. By selecting a different year-end, a business can better match its income and expenses to its operational flow.

The purpose of this election is to provide an alternative to the “required tax year,” which for most pass-through entities is a calendar year. This requirement ensures that a business’s income is reported by its owners in the same year it is earned, preventing tax deferral. The Section 444 election offers a structured exception, allowing for a modest deferral in exchange for compliance with specific payment requirements.

Eligibility for the Election

The option to make a Section 444 election is available to partnerships, S corporations, and personal service corporations (PSCs). These entities are subject to rules that dictate their tax year-end, which is often a calendar year. The election provides a formal pathway to deviate from this requirement.

A constraint on this election is the “deferral period,” which is the number of months between the end of the proposed fiscal year and the end of the required tax year. For example, if a business with a required December 31 year-end elects a September 30 fiscal year-end, the deferral period is three months.

Under Section 444, the deferral period for the elected tax year cannot be longer than three months. If a business is changing its tax year, the deferral period cannot be longer than the shorter of three months or the deferral period of the tax year being changed.

An entity that is part of a “tiered structure” is not eligible to make this election. A tiered structure exists if the business owns a portion of another deferral entity or is itself owned by a deferral entity. Furthermore, once a business terminates a Section 444 election, it is not permitted to make another one in the future.

Understanding Required Payments

Partnerships and S corporations that make a Section 444 election must make annual “required payments” to the IRS under Internal Revenue Code Section 7519. These payments are not a tax but are a non-interest-bearing deposit held by the government. The purpose of this system is to neutralize the tax-deferral benefit that the owners would otherwise receive from the entity using a fiscal year.

The required payment is calculated to approximate the value of the tax deferral. The calculation is based on the entity’s net income from the previous year, known as the “base year,” multiplied by the highest individual income tax rate plus one percentage point, and then adjusted for the deferral period.

Each year the election is in effect, the entity must recalculate this payment. If the business’s income increases, an additional payment may be due. Conversely, if income decreases, the entity may be entitled to a refund of a portion of the cumulative payments it has made, though no interest is paid by the IRS on these refunds.

If the total required payment for a given year is $500 or less, and no payment was required in any prior year, the entity does not have to make the payment for that year. The entity must still file the necessary form to report that no payment is due. The entire balance of these required payments is refundable to the entity if it terminates its election or liquidates.

Preparing the Election Form

To make the election, an eligible entity must file Form 8716, Election to Have a Tax Year Other Than a Required Tax Year. This form is the official notification to the IRS of the business’s intent to adopt, retain, or change to a fiscal year.

The preparer will need several pieces of information for the form, including:

• The business’s legal name, Employer Identification Number (EIN), and address
• The entity type (partnership, S corporation, or personal service corporation)
• The name of a person the IRS can contact for more information
• The telephone number for the contact person

A part of Form 8716 is providing the dates for the relevant tax years. The form asks for the ending date of the tax year from the entity’s last filed return or, for a new entity, the year-end it is adopting. It also requires the ending date of the required tax year and the fiscal tax year the entity is electing, indicating whether it is adopting, retaining, or changing its year.

Filing and Maintaining the Election

The submission of Form 8716 is time-sensitive. The form must be filed by the earlier of two dates: the 15th day of the fifth month following the month that includes the first day of the elected tax year, or the due date (without extensions) of the income tax return for the first year of the election. For example, if a business begins on October 1, 2024, and elects a September 30 year-end, its first tax return is due January 15, 2025, making this the deadline for Form 8716.

Making the election creates an ongoing annual compliance responsibility for partnerships and S corporations. Each year the election is in effect, the entity must file Form 8752, Required Payment or Refund Under Section 7519. This form is used to calculate the annual required payment or to claim a refund of prior payments and must be filed even if the calculated payment for the year is zero.

The due date for filing Form 8752 and making any required payment is May 15 of the calendar year following the calendar year in which the fiscal year begins. Failure to make the required payments can result in penalties and may lead to the termination of the Section 444 election. A copy of the initial Form 8716 should also be attached to the entity’s income tax return for the first year the election is effective.