9039 / When can a partnership or S corporation elect an otherwise impermissible accounting period?

Partnerships and S corporations are entities that are generally required to adopt a taxable year in accordance with certain specified requirements, as set forth in the Internal Revenue Code and Treasury Regulations.1 See Q 9037 (partnerships) and Q 9038 (S corporations) for the general rules applicable in establishing the accounting periods for these entities.

A partnership or S corporation is entitled to adopt an accounting period that varies from the otherwise specified requirements in the following cases:

(1)  The entity establishes a valid business purpose for adopting a different accounting period (see Q 9040);²

(2)  The entity elects a 52 to 53 week taxable year³ (see Q 9036);

(3)  The entity is entitled to use a grandfathered accounting period.

A grandfathered accounting period is an accounting period that either the partnership or S corporation has received permission to use on or before July 1, 1974 in an IRS letter ruling.⁴

The IRS will consider all of the facts and circumstances when determining whether to permit the adoption of an alternate tax year, including the tax consequences that would result from such a change.

In addition, a partnership or S corporation can elect to adopt a tax year other than its required year under Section 444 as long as the required accounting period is deferred for no more than three months.⁵ An entity that makes this election is required to make certain payments under Section 7519 that are based on a formula derived from the entity’s income for the year and the highest tax rate currently applicable under IRC Section 1 (37 percent for 2018-2025).⁶