You may be able to change your annual accounting period from a calendar year to a fiscal year. And that change possibly makes sense for a couple of reasons.
First, because a fiscal year may help your business better deal with the severe accountant shortages in the United States. And then, second, because the change will possibly give a business’s owners nearly an extra year of Section 199A deduction. But a bunch of questions need to be asked and answered, thus this FAQ…
In a Nutshell, What’s This About?
The Section 199A deduction expires for most taxpayers at the end of 2025, at least as the law now works. Specifically, it expires for taxpayers that use a calendar year as their taxable year.
But you can possibly get an extra year of Section 199A tax savings if you change from a calendar year to a fiscal year.
The reason? Section 199A does not apply to taxable years beginning after December 31, 2025. Thus, it does apply to taxable years beginning before December 31, 2025. For example, the calendar year that begins on January 1, 2025. As everybody already gets.
But other taxable years that begin before the December 31, 2025 cutoff date should work, too. For example, a taxable year that begins on February 1, 2025. Or March 1, 2025. And so on.
Note, too, that depending on the November election and then Congressional activity in 2025, Section 199A’s termination date might be extended. Or extended for some taxpayers.
How Quickly Do I Need to Move on This?
Pretty quickly if you think the existing law stands and Section 199A ends at the end of 2025.
Here’s why: The most likely fiscal year you would choose is the one that ends on November 30, 2025. That would mean your new taxable year begins on December 1, 2025. A taxable year which will mean you effectively enjoy Section 199A deductions on income earned in 2026. (For the first eleven months, that is.)
To do that, you’ll probably need to make a special election, called a Section 444 election, by May 15, 2025.
That sounds like plenty of time. But the problem with this timing? You’ll be looking for a tax accountant with special skills and available time either right before, during the middle of or right after tax season.
What If I Miss the May 15, 2025 Deadline?
You can make a late Section 444 election and hope the IRS processes the election in time for you to use it.
Quoting from the applicable form’s instructions, “Under Regulations section 301.9100-2, the entity is automatically granted a 12-month extension to make an election on Form 8716. To obtain an extension, type or legibly print “Filed Pursuant To Section 301.9100-2” at the top of Form 8716, and file the form within 12 months of the original due date.”
You can also qualify to use a fiscal year if you show a business purpose. A variety of acceptable business purposes exist. But the only truly practical one is the “natural year” business purpose. A natural year occurs when your partnership or S Corporation dependably generates at least 25 percent of its gross receipts within the same two-month interval every year. If a partnership or S corpoation uses this method of changing to a fiscal year, it can submit the required paperwork shortly after the requested natural year ends. This FAQ calls this fiscal year option a Section 442 natural year.
Can Anyone Change Their Taxable Year?
Most people probably. But not everyone. You must use a calendar year if you don’t keep formal books. Anyone who uses a shoebox full of receipts and invoices, for the record, falls into this category.
Another thing to note: The two practical ways to qualify for a fiscal year—that Section 444 election and Section 442 natural year already mentioned—require your accounting system to at least generate monthly financial statements. And then you need to have conformity between your accounting year and the way you do your books. That requirement means you need to have some accounting software you use (QuickBooks, Xero, Wave, NetSuite and so forth).
Can I Change to Any Tax Year I Want?
No. You are actually very limited. As noted you have essentially two options for getting the Internal Revenue Service to give you permission to change to a fiscal year. The Section 442 option which looks for a natural year. And the Section 444 election.
With the Section 442 natural year option, you pick the fiscal year that shows the natural year.
With the the Section 444 election, you end your fiscal year September 30, October 31, or November 30. (You probably get to pick which year-end you want. But it must be one of these three choices.)
Which is Best Option: Section 444 Election Year or Section 442 Natural Year?
You need to look at how much tax the Section 199A deduction saves using each of the options. And then you also want to consider the complexity of the two choices.
The Section 444 election year creates some extra work (which is bad) and it requires you to plan way ahead (also bad given the shortages of accountants). But if you end your fiscal year on November 30, you get a pretty decent tax savings windfall.
The Section 442 natural year option gives you more time to make the change. And though the actual paperwork requried is more complicated, after you get your fiscal year, the tax accounting works more easily. But a Section 442 natural year probably reduces your Section 199A deduction.
If the two choices mean similar year ends? Say you can do a Section 442 natural year that ends in October 31. But you can do a Section 444 election year that ends November 30? You’ll maybe pick the natural year.
But if the choice is a Section 442 natural year ending in April versus a Section 444 year ending in November, probably you’d go with the Section 444 option.
Are You Ever Required to Use Calendar Year?
You may be required to use a calendar year. And if that’s the case, you can’t change your accounting year from a calendar year to a fiscal year.
Which firms does tax law require a calendar year for? Two groups. First, firms that use a calendar year as the “annual period on the basis of which the taxpayer regularly computes his income in keeping his books.” This requirement comes from Section 441(c). Accountants call it the conformity requirement.
Tax law, specifically Section 441(g), also requires a second group to use a calendar year. This group includes firms that simply don’t keep books or do financial recordkeeping.
As a practical matter then, a business must have a real accounting system. Not a shoebox of receipts and invoices. And it must prepare and use annual profit and loss statements that use the new fiscal year.
What Business Purposes Justify Changing to Fiscal Year
As a practical matter, only one business purpose cleanly justifies changing from a calendar year to a fiscal year: When a natural year exists. A natural year exists when 25 percent or more of gross receipts fall into the same two months every year.
A firm that generates $1,000,000 of gross receipts over the year and generates $250,000 of that income in the same two-month interval every year has a natural year. It may elect to use a fiscal year that ends with those two big months.
If a business’s gross receipts show more than one natural year, the firm use use the natural year that stacks the most gross receipts into a two-month interval.
Can I Be Required to Use Fiscal Year
Yes, tax law may require you to use a fiscal year in some situations. The common case? To match the fiscal year or years of firm owners.
A partnership’s fiscal year should match its majority interest partner if that partner owns more than 50 percent, for example. Or when no one partner owns more than 50 percent, the partnership should use a fiscal year that matches the fiscal year of most of its partners or a fiscal year that minimizes any tax deferral benefits.
An S corporation fiscal year should match its owner’s year as best it can. Almost always, that means an S corporation uses a calendar year as its annual accounting period. But in the unlikely case where an S corporation’s single shareholder uses a fiscal year ending June 30, the S corporation should too.
What Paperwork is Required to Begin Using a Section 442 Natural Year
Probably not you but more likely your accountants need to timely file and prepare a Form 1128. The form identifies the business, documents your request for permission to use a natural year and includes workpapers that proves a natural year exists. If more than one natural year exists, the workpapers need to show the best natural year is the one you’re asking to use.
The 1128 can be filed as soon as the first day after the desired fiscal year ends. For example, if the desired fiscal year ends November 30, 2024 the 1128 can be filed as soon as December 1, 2024.
The 1128 should be filed by the due date (including the extended due date) of the fiscal year tax return.
What Paperwork is Required to Begin Using a Section 444 Fiscal Year
You or possibly your accountants need to timely file and prepare a Form 8716. The form simply identifies the business and the permitted year selected and officially makes the Section 444 election required to use a, for example, November 30 fiscal year end.
The 8716 should be filed by the earlier of “the 15th day of the fifth month following the month that includes the first day of the taxable year for which the election will be effective, or the due date (without regard to extensions) of the income tax return resulting from the Section 444 election.” But a business may file a late election by invoking Regulations section 301.9100-2 as described in the form instructions.
Thus, if an already operating business currently using a calendar year wants to use November 30, 2025 as the fiscal year end of the first non-calendar year, the 8716 should be filed by April 15, 2025. But in a pinch it can probably be filed by April 15, 2026.
An important note: A business may only make one Section 444 election ever.
What is a Backup Section 444 Election
A backup Section 444 election is one you file with a 1128 form such as when making a Section 442 natural year request. You file the backup Section 444 election in case the Form 1128 request fails.
Note that if you do not file a backup Section 444 election and the Form 1128 request fails, you probably won’t know soon enough to prepare a timely Section 444 election.
What is the Section 7519 Tax Deferral Deposit
With a Section 444 fiscal year—but not with a Section 442 natural year–you also need to calculate the tax deferral benefit of the fiscal year and pay that amount to the Treasury. Almost surely your accountant calculates the amount. And then you pay the deposit using a Form 8752.
The deposit essentially equals the tax you owe on the income the fiscal year might let you delay paying taxes on. For example, if a business makes $100,000 a month, using a November 30 year end means December’s $100,000 of profits is always included in the subsequent year’s taxable income.
To remove the tax deferral benefit of the one-year delay, Section 444 requires the business pay a deposit equal to the monthly profit times this percentage: The top marginal tax rate plus one percent. In 2024, for example, with $100,000 of monthly profit and a top marginal tax rate of 37 percent, the deposit equals $100,000 times (37 percent + 1 percent), so $38,000.
A taxpayer who pays a lower marginal tax rate—like 24 percent—still uses the top marginal tax rate to calculate the deposit.
How Does the Entity Pay the Section 7519 Deposit
The partnership or S corporation calculates its Section 7519 deposit using a Form 8752. The 8752 should be filed and the payment made by the May 15 of the new fiscal year. For example, if a fiscal year starts December 1, 2025, the 8752 form and the deposit are due May 15, 2026. The business pays the deposit using the Treasury’s eftps.gov system.
Do Fiscal Years Create Extra Accounting
Yes. Thus, you want to not thoughtlessly change.
As noted, you need to continue to have a good accounting system. You need to really use the fiscal year as your annual accounting period. This conformity requirement would mean for example that you use the fiscal year to report your profits to creditors or owners.
If you close the books formally, you would need to do that for the fiscal year not the calendar year. If you use accounting software that doesn’t provide for a formal closing (where you zero out income and expense accounts using the retained earnings account) you want to change the fiscal year setting to match your new fiscal year.
If you use a Section 442 natural year, you need to double-check the natural year still exists by double-checking the “25 percent of gross receipts in two months” requirement.
If you use a Section 444 fiscal year, you need to recalculate the appropriate tax deferral deposit amount. You would need to pay an additional increment if monthly profits have grown. You would claim a partial refund of your previous deposit if monthly profits for the current year have declined.
Can Fiscal Year Changes Be Reversed in Future
Yes, you can and may even be required to change your fiscal year again in future.
You would be required to change a Section 442 natural year if you lose your eligibility to use a particular year. For example, if your natural year disappears.
You can also change from a Section 442 natural year back to a calendar year after a 48-month waiting period. (You would file another 1128.)
You can terminate a Section 444 election too—and without any waiting period. For example, you could terminate a Section 444 election after trying it for a year.
Can A 52-53-Weeks Year Be Used
A 52-53-weeks year is an annual accounting period that ends on the same day of the week each year. For example, the last Friday of the last month in the accounting year. So, like the last Friday in December.
You can elect to use a 52-53-weeks year by filing Form 1128. However, a 52-53–weeks year alone does not work for obtaining an extra year of Section 199A deduction. The reason is Section 441 (the chunk of law that allows taxpayers to elect to use a 52-53 -eeks year) says a firm ignores the 52-53-weeks year for purposes of determining effective dates and just uses the closest month end or month start.
There’s a potentially catastrophic error some taxpayers will make here, so a bit more detail.
Section 199A(i) says the “section shall not apply to taxable years beginning after December 31, 2025.” Thus, one might guess that a fiscal year ending on the last Friday in December, so December 26, 2025, might work. That would mean the new fiscal year begins on December 27, 2025. However, Section 441(f)((2)(A) says in this case you would use January 1 for this 52-53-weeks year taxpayer to determine whether it’s eligible for another bite at the Section 199A apple.
Can Tiered Ownership Structures Use Section 444 Fiscal Year
In general, no. But Section 444 allows tiered structures that contain only partnerships and S Corporations.
For example, a partnership of partnerships and a partnership of S corporations should usually be able to make a Section 444 election and use a Section 444 fiscal year. But a partnership of S corporations and C corporations should not be able to make a Section 444 election.
One wrinkle: All the partnerships and S corporations in the tiered structure need to use the same taxable year. If the mothership partnership elects a November 30 permitted fiscal year, each of the child partnerships also needs to elect the same November 30 permitted fiscal year.
Does Section 199A(i) Fiscal Year Change Make Financial Sense
Under current law, and as of October 2024, a partnership or S corporation that changes its fiscal year should get extra months or even nearly an extra year of Section 199A deduction. This outcome represents a “black letter law” reading of Section 199A(i). Furthermore, typically a Section 199A deduction allows taxpayers to avoid taxes on the last 20 percent of their business income. Thus, some taxpayers may enjoy significant savings through a fiscal year change.
An S corporation or partnership earning $5 million in business income might generate a $1 million Section 199A deduction for its owners. Adding that deduction to the owner’s or owners’ 2026 tax returns might save $396,000 in federal income taxes. That savings amount probably easily justifies the time and costs of making the change.
In comparison, however, the typical small business partnership or S corporation often won’t save enough to make the change worthwhile. A partnership or S corporation earning $100,000 in business income might generate a $20,000 Section 199A for its owners, for example. But that deduction if the marginal federal tax return equals 25 percent saves the taxpayer about $5,000. That amount may not merit the cost of changing the fiscal year let alone the annual extra effort of using a fiscal year.
Can Taxpayers Do the Fiscal Year Change Work Themselves
To change the taxable year safely and efficiently, an accountant or taxpayer should understand several relevant sections of the Internal Revenue Code including Sections 441, 442 and 444. (These sections and the companion regulations describe accounting years and changes in accounting years.)
To use a fiscal year to optimize the Section 199A deduction, an accountant or taxpayer should also understand the Section 199A statute and the companion regulations.
Preparers whether accountants or taxpayers would also want to read (perhaps multiple times) Revenue Procedure 2006-46 and then the instructions for the 1128, 8716 and 8752 forms.
Can IRS Challenge a Section 199A(i) Fiscal Year Change
The IRS can reject or deny permission if you incompletely prepare the forms used to make the Section 444 election or ask permission to use a Section 442 natural year.
The IRS might also theoretically revoke automatic permission granted earlier if a firm fails to follow the rules. For example, if a firm fails to maintain books and financial records in conformity with its fiscal year.
We also think that while Section 199A(i) clearly allows a fiscal year firm to get a Section 199A deduction from income earned in a fiscal year that starts before January 1, 2026, the Treasury or IRS might rule differently on this matter. They might also simply not issue instructions or comment on the tax accounting treatment described here. And that would of course create some risk. (Even if the treatment described here is correct, an IRS auditor might misread the law.)
A final related note: You should not trust the large-language-model artifical intellgence agents like ChatGPT to give 100 percent reliable answers to tax law questions. But if you do ask ChatGPT about what Section 199A(i) means for fiscal year taxpayers, it gives the same answer this page does.
Why Might IRS Challenge a Section 199A(i) Fiscal Year Change
We think the whole confusion about how fiscal years affect the termination of Section 199A stems from a mistakenly applied regulation the Treasury wrote in 2018 and 2019 about when taxpayers could begin using the new deduction. (The Section 199A deduction became law starting in 2018.)
These original Treasury regulations for Section 199A said the Section 199A deduction looks at the year the fiscal year ends to determine whether a fiscal year starting in 2017 gets a Section 199A deduction in 2018. Somewhat surprisingly, the regulations gave taxpayers a full Section 199A deduction for these fiscal year partnerships and S corporations if their fiscal years ended in 2018. Even though a chunk of the fiscal year occured before 2018 when Section 199A became applicable.
Quite frankly, initially we too thought that fiscal years starting in 2025—by the law the last year Section 199A would be applicable—would use the same approach. But upon rereading the statute, we now think that reading was clearly incorrect.