A tax year is an accounting method used to determine the amount to be reported for income and expenses plus record keeping. Picking a tax year to use in a partnership can be really hard especially if you have multiple partners. Every partnership must conform to the partners tax year as a required tax year for their partnership. The partners tax year is determined by their regular tax year as a taxpayer or if they had already chosen a fiscal year before entering into a partnership. According to the IRS the only exceptions are:
There are a few rules to follow when you are determining your required tax year:
This is a method that IRS recommends after everything fails. Basically you collect all the different tax years of the partners. For e.g., one partner might use Dec. 31st, but someone else might use March 31st or May 31st. You now pick one partner, Joe with a tax year ending March 31st. And now you use everyone elses tax year to determine the difference in the months with Joes. For e.g., Mikes tax year ends on Nov. 30. For our example we will suppose that there are only two partners, Joe and Mike. They both own 50% of stock in the company. Now you count forward from the end of Joes tax year to the end of Mikes tax year. Joes tax year ends on March 31st. So you start counting from April, May, June, July, August, September, October, and November. Now you count the month listed above and you get 8. You multiply .50 (50%) by 8, which equals 4.0. This is the aggregate deferral for Mike. You do the same thing using Mikes tax year and counting forward to the end of Joes tax year. This time you get 4 (December, January, February, and March). You multiply .50 by 4, which equals 2.0. This is the aggregate deferral for Joe. The least aggregate deferral belongs to Joe, so the partnership will use his tax year ending on March 31st and beginning on April 1st.
All of this is not as simple as it sounds but we hope that we have made the process easier for you. If a partnership changes its tax year in the middle of a previous tax year that they were using then they have to file a short term period return. This is usually the form 1065.