What Is Form 8553 for an S Corporation Tax Year?

When a business elects to be an S corporation, it must also select a tax year. The Internal Revenue Service (IRS) mandates that S corporations use a calendar year ending on December 31. However, a business can request a different fiscal year if it has a valid reason.

A business making its initial S corporation election uses Form 2553, Election by a Small Business Corporation, to establish its tax year. An existing S corporation that wishes to change its tax year must file Form 1128, Application to Adopt, Change, or Retain a Tax Year.

Reasons for Adopting a Fiscal Tax Year

The calendar year structure is intended to align the corporation’s tax year with that of its individual shareholders, who almost always use a calendar year for their personal tax returns. This alignment prevents the deferral of income from one year to the next. A business may seek to adopt a fiscal year for one of two primary reasons.

The most common justification is the existence of a “natural business year.” This occurs when a company earns a substantial portion of its revenue during a specific part of the year. For example, a ski resort’s business cycle ends in the spring, not in the middle of its peak season on December 31. Adopting a fiscal year-end that follows this peak allows for more accurate financial reporting.

A second path is the Section 444 election, made on Form 8716, Election to Have a Tax Year Other Than a Required Tax Year. This election permits an S corporation to select a fiscal year for reasons other than a natural business cycle. To counteract the tax deferral advantage gained by shareholders, the corporation must make “required payments” to the IRS.

Requirements for a Fiscal Tax Year

Any request requires basic corporate details, including the legal name, Employer Identification Number (EIN), and principal business address. To request a tax year based on a natural business year on Form 1128, the corporation must satisfy the 25% gross receipts test. This test requires the business to show that for the last two consecutive years, at least 25% of its total gross receipts for each 12-month period were received in the final two months of the proposed fiscal year.

For a Section 444 election using Form 8716, the corporation must specify the desired tax year-end. The “deferral period”—the time between the end of the elected fiscal year and the required calendar year-end—cannot be longer than three months. This means if the required year-end is December 31, the earliest fiscal year-end that can be elected is September 30.

How to Request a Fiscal Tax Year

The form must be signed by an authorized corporate officer. An existing S corporation requesting a change to a natural business year files Form 1128. The filing deadline is the 15th day of the third month after the short tax year ends. For example, if a corporation wants a fiscal year ending March 31, creating a short tax year from January 1 to March 31, the form would be due by June 15.

For a Section 444 election, the corporation must file Form 8716. This form must be filed by the earlier of the 15th day of the fifth month after the new fiscal year begins, or the due date for the tax return of the first effective year.

For requests not granted automatically under IRS procedures, the corporation must wait to receive a ruling letter from the IRS before filing any tax returns with the new tax year. It is important to retain a copy of the filed application with the corporation’s permanent records.