@060 CHAP 8 旼컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴커 � SELECTING A FISCAL YEAR FOR TAX PURPOSES � 읕컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴컴켸 . ABILITY TO UTILIZE FISCAL TAX YEAR TO DEFER INCOME. Since the Tax Reform Act of 1986, most opportunities for income tax deferral by selecting different tax year-ends for an owner and his or her business entity have been elim- inated, at least for partnerships, S corporations, and "personal service corporations." While the latter types of entities may still make a special election to have a September, October or November fiscal year, the election, in effect, requires the entity to agree to give up any tax deferral benefits that might result from using the fiscal year, and thus will be of little benefit for tax purposes. However, it is still possible for a C corporation that is not a personal service corporation to elect a fiscal year (such as a year that ends January 31) and obtain signifi- cant tax deferral benefits by paying a relatively low base salary through December of each year to its employee-owners. Then, in January of 1994, for example, it can pay a large bonus to reduce the corporation's taxable income for the year of February 1, 1993 to January 31, 1994. Because the employee-owner would be on a calendar year for tax pur- poses, the bonuses would not be taxable income to the employee-owner for the year 1993, since not received until January, 1994. @IF117xx]PLANNING NOTE FOR @NAME: @IF117xx]----------------------------------------------------------- @IF117xx]Your business is organized as a C corporation, and thus may @IF117xx]be able to take advantage of such status to elect a fiscal @IF117xx]year for tax purposes. However, to do so, you will have to @IF117xx]determine that your corporation is not a "personal services @IF117xx]corporation," as discussed below. (Use the XPERT menu sel- @IF117xx]ection in this program for a "consultation" as to whether @IF117xx]your firm is or is not a "personal services corporation.") @IF117xx]----------------------------------------------------------- @IF117xx] There are a number of different definitions of "personal service corporations" in the Tax Reform Act of 1986, all fairly similar but each confusingly different in certain respects. The type of personal service corporation that is prohibited from using a fiscal tax year for tax deferral purposes is one whose principal activity is the performance of personal services, where those services are "substanti- ally performed" by employee-owners. Any employee who owns any stock whatsoever is considered an "employee-owner" in this definition, so it is difficult to avoid this classi- fication if your corporation is engaged in a service busi- ness of the a kind covered by the IRS's voluminous Regula- tions on this subject. If your C corporation is not a "personal service corpora- tion," you may want to adopt a January 31 fiscal year for it to obtain maximum tax deferral advantages. However, in some cases (where yours is a seasonal business, for exam- ple), you may want to select a tax year that ends just be- fore your most profitable season begins, in order to defer taxes at the corporate level. Thus, if you are in the business of selling Christmas tree ornaments and do most of your business from October through December each year, you might choose a September 30 tax year. . NON-TAX REASONS WHY YOU MIGHT WANT TO CHOOSE A FISCAL TAX YEAR. Remember that tax considerations are not the on- ly factors to take into account in choosing a fiscal year. If taking an annual inventory is a major task, consider adopting a year-end that occurs when inventory is at a low ebb and when business is slow, if possible. You may also find that you will get somewhat quicker and better service from your CPA firm for annual tax returns, audits, etc., if you pick a fiscal year that ends several months before or after December, since most CPAs are at their busiest during the frantic annual tax season from about February to May, preparing tax returns and doing audits for their many clients who have December year-ends.