What is a Short Tax Year?
If you start your business after the first month of your tax year or end it before the last month of your tax year, you'll have a short tax year (less than twelve months). Your tax return for the short tax year should reflect income and expenses for the period of time your business was in operation that year.
- You're a sole proprietor. You started your business July 1, 2013 and went out of business November 30, 2013.
For tax year 2013, Schedule C will include gross revenue and expenses covering July 1, 2013 through November 30, 2013. You file Form 1040 on or before April 15, 2014 and attach Schedule C (and Schedule SE if your net earnings form self-employment are at least $400).
- Ann Green was a single, calendar year taxpayer. She died on March 6, 2013.
Her final income tax return must be filed by April 15, 2014. It will cover the short period from January 1, 2013, to March 6, 2013.
- XYZ Corporation was organized on July 1, 2013. It elected the calendar year as its tax year.
XYZ Corporation's first tax return is due March 15, 2014. This short period return will cover the period July 1 - December 31, 2013.
Figuring Tax for Short Year
If the IRS approves a change in your tax year or you are required to change your tax year, you must figure the tax and file your return for the short tax period.
The short tax period begins on the first day after the close of your old tax year and ends on the day before the first day of your new tax year.
Figuring Your tax for a Short Year Under the General Rule
Under the general rule, income tax for a short tax year must be annualized. However, self-employment tax is figured on the actual self-employment income for the short period.
An individual must figure income tax for the short tax year as follows.
- Determine your adjusted gross income (AGI) for the short tax year and then subtract your actual itemized deductions for the short tax year. You must itemize deductions when you file a short period tax return.
- Multiply the dollar amount of your exemptions by the number of months in the short tax year and divide the result by 12.
- Subtract the amount in (2) from the amount in (1). The result is your modified taxable income.
- Multiply the modified taxable income in (3) by 12, then divide the result by the number of months in the short tax year. The result is your annualized income.
- Figure the total tax on your annualized income using the appropriate tax rate schedule.
- Multiply the total tax by the number of months in the short tax year and divide the result by 12. The result is your tax for the short tax year.
Individuals and corporations can use a relief procedure to figure the tax for the short tax year. It may result in less tax. Under this procedure, the tax is figured by two separate methods. If the tax figured under both methods is less than the tax figured under the general rule, you can file a claim for a refund of part of the tax you paid.
For more information, see section 443(b)(2).
Alternative Minimum Tax
To figure the alternative minimum tax (AMT) due for a short tax year, you figure the annualized alternative minimum taxable income (AMTI) for the short tax period by completing the following steps:
- Multiply the AMTI by 12
- Divide the result by the number of months in the short tax year
- Multiply the annualized AMTI by the appropriate rate of tax under section 55(b)(1). The result is the annualized AMT
- Multiply the annualized AMT by the number of months in the short tax year and divide the result by 12.
- Return to the Tax Basics for Startups Table of Contents to find related links.