Tax Law Blog
Kalamazoo - Tax Law Blog

Accounting Periods for Small Businesses:

Posted December 2, 2018

When preparing a statement of income and expenses (generally your income tax return), you must use your books and records for a specific interval of time called an accounting period. The annual accounting period for your income tax return is called a tax year. You can use one of the following tax years.

  • A calendar tax year.
  • A fiscal tax year.

Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. You must adopt the calendar tax year if any of the following apply.

  • You do not keep books.
  • You have no annual accounting period.
  • Your present tax year does not qualify as a fiscal year.
  • Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations.

If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year.

A fiscal tax year is 12 consecutive months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. Generally, you must file an Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. If you qualify for an automatic approval request, a user fee is not required. If you do not qualify for automatic approval, a ruling must be requested.


Bankruptcy and Tax Law:

Posted November 1, 2018

Individuals in Chapter 7 or 11

When an individual debtor files for bankruptcy under chapter 7 or 11 of the Bankruptcy Code, the bankruptcy estate is treated as a new taxable entity, separate from the individual taxpayer. The bankruptcy estate in a chapter 7 case is represented by a trustee. The trustee is appointed to administer the estate and liquidate any nonexempt assets. In chapter 11 cases, the debtor often remains in control of the assets as a “debtor-in-possession” and acts as the bankruptcy trustee. However, the bankruptcy court, for cause, may appoint a trustee if such appointment is in the best interests of the creditors and the estate.

During the chapter 7 or 11 bankruptcy, the debtor continues to file an individual tax return on Form 1040. The bankruptcy trustee files a Form 1041 for the bankruptcy estate. However, when a debtor in a chapter 11 bankruptcy case remains a debtor-in-possession, he or she must file both a Form 1040 individual return and a Form 1041 estate return for the bankruptcy estate (if return filing requirements are met).

Although a husband and wife may file a joint bankruptcy petition whose bankruptcy estates are jointly administered, the estates are be treated as two separate entities for tax purposes. Two separate bankruptcy estate income tax returns must be filed (if each spouse separately meets the filing requirements).

Individuals in Chapter 12 or 13

Only individuals may file a chapter 13 bankruptcy. Chapter 13 relief is not available to corporations or partnerships. The bankruptcy estate is not treated as a separate entity for tax purposes when an individual files a petition under chapter 12 (Adjustment of Debts of a Family Farmer or Fisherman with Regular Annual Income) or 13 (Adjustment of Debts of an Individual with Regular Income) of the Bankruptcy Code. In these cases the individual continues to file the same federal income tax returns that were filed prior to the bankruptcy petition, Form 1040, U.S. Individual Income Tax Return.

On the debtor's individual tax return, Form 1040, report all income received during the entire year and deduct all allowable expenses. Do not include in income the amount from any debt canceled due to the debtor's bankruptcy. To the extent the debtor has any losses, credits, or basis in property that were previously reduced as a result of canceled debt, these reductions must be included on the debtor's return. See Debt Cancellation, later.

In chapter 13 proceedings, do not include interest earned on amounts held by the trustee in trust accounts as income on the debtor's return. This interest is not available to either the debtor or creditors, it is available only to the trustee for use by the U.S. Trustee system. The interest is also not taxable to the trustee as income.


Tax Recordkeeping:

Posted October 22, 2018

Keep all records of employment taxes for at least 4 years. These should be available for IRS review. Your records should include the following information.

  • Your EIN.
  • Amounts and dates of all wage, annuity, and pension payments.
  • Amounts of tips reported to you by your employees.
  • Records of allocated tips.
  • The fair market value of in-kind wages paid.
  • Names, addresses, social security numbers, and occupations of employees and recipients.
  • Any employee copies of Forms W-2 and W-2c returned to you as undeliverable.
  • Dates of employment for each employee.
  • Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third party payors made to them.
  • Copies of employees' and recipients' income tax withholding allowance certificates (Forms W-4, W-4P, W-4(SP), W-4S, and W-4V).
  • Dates and amounts of tax deposits you made and acknowledgment numbers for deposits made by EFTPS.
  • Copies of returns filed and confirmation numbers.
  • Records of fringe benefits and expense reimbursements provided to your employees, including substantiation.