Form 1128: How to Change Your Business Tax Year

You can change your business tax year, the fiscal year end your books and returns run on, but not simply by deciding to. In most cases you need IRS approval first, and that request is Form 1128.

Which version of the request you file, and when it is due, depends on whether you qualify for automatic approval or have to ask for a ruling. Those two routes have different deadlines and different costs.

TL;DR

• Can you change it: yes, with IRS approval. Moving your fiscal year end is a formal request, made on Form 1128, Application to Adopt, Change or Retain a Tax Year.
• Two routes, two deadlines: automatic approval is free and its deadline allows extensions. A ruling request carries a user fee and its deadline does not.
• What it is: a short mail-in form, Parts I plus either II or III, never both.
• Filling it in: Part I for everyone, then Part II for automatic approval or Part III for a ruling.
• Not everyone files: a business adopting its first tax year generally needs no Form 1128, and nor do several other situations.
• The short period: the stub year between your old fiscal year end and your new one needs its own return, with full late-filing penalties.
• Special cases: exempt organizations usually file a return instead, a foreign parent's year-end is a recognizable business purpose, and partnerships, S corps and PSCs can elect under section 444 on Form 8716.

Can You Change Your Business Tax Year?

Yes, though the default answer for most entities is that you need permission. Once a business has adopted a tax year by filing its first return, changing it requires IRS approval.

The reasons businesses want to change are usually practical:

• Aligning a subsidiary's year-end with a parent company's
• Moving the year-end away from a seasonal peak so the books close in a quiet month
• Matching an industry convention that investors or lenders expect
• Simplifying after a restructuring left related entities on different year-ends

A change you want is not automatically a change you qualify for. The IRS wants a business purpose for the new year, and convenience for your accountant does not meet that bar on its own.

What Counts as a Business Purpose

In most cases a natural business year meets the business-purpose bar. Where your trading pattern genuinely peaks and troughs, the year-end that follows the trough is defensible in a way an arbitrary date never is.

Some entities face a required tax year before any of this arises. Partnerships, S corporations and personal service corporations are pushed toward particular year-ends by statute, which is why they recur throughout the Form 1128 rules while an ordinary C corporation has more latitude.

Knowing which position you are in changes the question. A C corporation is usually asking whether it can justify the year it wants, while an S corporation is often asking whether it can depart from the year it is required to use.

What Form 1128 Actually Is

Form 1128 is the Application to Adopt, Change or Retain a Tax Year. One form covers all three situations, so the title is broader than "change".

The form runs to three parts, and you complete Part I plus either Part II or Part III, never both.

Physically it is a short form. The current version carries an October 2014 revision date with November 2017 instructions, so an old download is usually still the right one, and it goes to the IRS by mail rather than through an e-filing system.

Which of Part II or Part III applies decides everything downstream. Your deadline and your cost both follow from that single determination.

Automatic Approval or Ruling Request?

Automatic approval is the route you want. Where you meet the conditions in one of the relevant revenue procedures, you are deemed to have established a business purpose, and the IRS does not weigh your facts individually.

Those conditions live in revenue procedures, outside the form itself:

• Rev. Proc. 2006-45 and 2006-46 cover the common corporate, partnership and S corporation cases
• Rev. Proc. 2003-62, 85-58 and 76-10 cover others, including certain individuals and exempt organizations

That structure explains why the form looks short. Part II asks you to confirm you meet conditions that are written elsewhere, so the real reading happens before you start filling anything in.

The procedures also carry their own disqualifiers. Under Rev. Proc. 2006-45 and 2006-46, a prior change within the last 48 months or an entity under examination can rule out the automatic route even where the year you want looks reasonable. Check the exclusions as carefully as the conditions.

Note the deadline row. Automatic approval lets you use extensions; a ruling request does not. The route that takes longer to decide therefore gives you less time to file.

The 25% Test That Establishes a Natural Business Year

A natural business year is the most common way to qualify without a ruling, and it is a measurable test rather than a judgment.

Take gross receipts from sales and services for the last two months of the twelve-month period you want, and divide by the receipts for those full twelve months. Where that figure is 25% or more, and it holds for each of the three preceding years, the year qualifies.

The test has to hold for three consecutive years, not just the most recent one. One strong season does not establish a pattern, and the whole look-back has to qualify.

Completing Form 1128, Part by Part

Most of the effort sits in Part I. Most of the thought sits in knowing which second part to open.

Part I asks who you are and what you want: the entity's name and identifying number, its type, the tax year it currently uses, the year it wants, and the short period the change will create.

One question in that section does more work than the rest. Asking whether you have changed your tax year before is what determines whether the automatic route is open to you, so answer it before you decide which part to complete.

• Part II, automatic approval: work through the conditions in the relevant revenue procedure and confirm you meet them. No argument to make, only tests to satisfy.
• Part III, ruling request: set out the business purpose for the new year and the facts supporting it. This is where the user fee attaches.

Two mechanical points save rework:

• Signatures matter. The form is signed under penalties of perjury, so it must be signed by someone with authority to bind the entity
• The current version of the form carries an October 2014 revision date and its instructions a November 2017 one, so an old download is usually still the right one

Where the entity sits inside a group, check whether related filers need their own applications before you submit. A single form does not cover several taxpayers, even where the reason for the change is shared.

Who Does Not Need to File Form 1128

Several situations need no application at all, and filing one unnecessarily creates work rather than protection.

You generally do not file Form 1128 if you are:

• A corporation adopting its first tax year
• A newly formed partnership adopting a required tax year
• A partnership, S corporation or personal service corporation terminating a section 444 election
• A newly married individual changing to a spouse's tax year
• A trust adopting a calendar year under section 644
• An estate adopting its first tax year

The first entry there is the one to check carefully. Adopting a tax year and changing one are separate acts. A new company simply files its first return on the year it intends to keep.

Filing the Form, and the Return That Follows

Approval settles the year. The short period, the stub year created by moving your year-end, still has to be filed.

Your short period begins the day after your old tax year closes and ends the day before your new tax year starts. It runs to less than twelve months, and it needs its own return.

• Determine your route, automatic or ruling, before anything else
• Complete Part I, then Part II or Part III as it applies
• File by that route's deadline, to that route's address
• File a separate return for the short period
• Resume normal annual filing on the new year-end

Income is not annualized away by the change. A short period of a few months is a real tax year with a real return, and deductions and credits that assume twelve months may need proration.

Worth knowing: where shareholders need a corresponding change to their own tax years, each one files a separate Form 1128. Approval for the company does not carry across to the people who own it.

What Happens After You File

Automatic approval requests are processed at the service center, and the approval is conditional on your having genuinely met the revenue procedure's tests. Where you file under Part II without meeting them, the IRS can treat the change as invalid.

Ruling requests go to the Associate Chief Counsel and take considerably longer, because somebody reads your facts. Build that time into the plan if the change has a commercial deadline attached, such as a reporting alignment promised to an investor.

In both cases, keep the approval with your permanent records. Diligence teams ask why a short-period return exists, sometimes years later.

The Section 444 Alternative

Partnerships, S corporations and personal service corporations have a second route that does not involve Form 1128 at all.

A section 444 election, made on Form 8716, lets these entities keep a tax year other than the one otherwise required of them. It is an election you make rather than approval you request, so no business purpose has to be shown.

The election has a firm deadline: file Form 8716 by the earlier of the due date (not including extensions) of the return for the year the election produces, or the 15th day of the 5th month following the month containing the first day of that year.

Note that a section 444 election carries its own conditions and required payments, so it is not a free alternative to seeking approval. Which route suits you depends on the entity type and how far the year you want sits from the required one.

The two are not mutually exclusive across a company's life either. An entity that made a section 444 election and later wants to terminate it appears in the list of filers who need no Form 1128 at all.

How Exempt Organizations Change Their Accounting Period

A tax-exempt organization generally changes its accounting period by filing a return for the short period with "Change in Accounting Period" written at the top. In most cases no Form 1128 is needed.

One exception turns on history. An organization must file Form 1128 with the short-period return where both of these hold:

• It changed its accounting period within the preceding ten calendar years
• It had a filing requirement at some point during that period

Your short-period return should also state the reason for the change, either that Form 1128 was approved or that the Revenue Procedure 85-58 rules apply.

That ten-year test is the part to check before assuming the simpler route. An organization that changed once before and files an annual return has to establish when that earlier change happened, because it decides whether this change needs an application at all.

A Foreign Parent's Year-End Is a Recognizable Business Purpose

Alignment is the usual driver here. A parent on a 31 March year-end in India, or a 31 December one elsewhere, wants its US subsidiary on the same cycle, which avoids:

• A second set of numbers produced purely for consolidation
• Audit timetables that never line up between parent and subsidiary
• Intercompany balances measured at two different dates

That is a recognizable business purpose, though the facts decide it, not the intention.

Where the US entity's own circumstances fit an automatic approval procedure, the route is straightforward. Where they do not, a ruling request puts the group's reporting rationale in front of the IRS.

Timing deserves attention in a group context. The short period lands in the middle of a consolidation cycle, and a US subsidiary filing a part-year return while the parent reports twelve is a reconciliation somebody has to explain.

Three practical points for a group making this move:

• Decide the effective year before the US entity files its next return, since filing again on the old year makes the change a later problem
• Check whether the US entity's own circumstances fit an automatic procedure before assuming a ruling is needed
• Plan the short period around audit and consolidation dates, not only around the tax deadline

Four Mistakes Worth Avoiding

All four are avoidable by checking one thing before you file.

The Ruling Deadline Ignores Your Extension

The two routes have genuinely different due dates, and the more demanding route has the tighter one. A ruling request is due by the return's due date without extensions, so an extension you validly filed does not move it.

That assumption costs a year. A late ruling request generally means the change does not take effect for the year you wanted, and the whole exercise repeats.

Two dates are worth writing down the moment you pick a route:

• The unextended due date of the return for the first effective year, if you are going the ruling route
• The extended due date of the short-period return, if you qualify for automatic approval

You Still Owe a Return for the Stub Year

Approval changes your year-end. It does not file anything on your behalf, and the stub period between the old year and the new one is a separate return with its own due date.

Because that return is short and often small, it can read as an administrative note instead of a filing. Late-filing penalties apply to it exactly as they would to a full year.

Run the 25% Test Before You Assume a Natural Business Year

Convenience is not a business purpose. Preferring a quieter month, or matching a personal preference, will not carry a ruling request on its own.

Run the test across all three look-back years before you assume the natural business year route is open:

• If the arithmetic holds across all three, you can take the automatic route with no fee and no review
• If it does not, you are in ruling-request territory, with a user fee and a review attached

Keep the working either way. A ruling request setting out a tested calculation reads differently from one asserting a seasonal pattern without showing it.

Filing Your First Return Locks In the Year

A new entity choosing its first tax year is adopting, not changing, and generally files nothing. Submitting Form 1128 in that situation creates correspondence to resolve.

The line to remember: a business that has already filed a return has adopted that year. Moving it afterwards is a change requiring approval, whatever the original intention was.

Three Questions That Settle the Whole Exercise

Deciding late is what makes a tax-year change expensive. These three questions settle the shape of the exercise before any form is opened.

• Have you already filed a return? If not, you are adopting a year and probably file nothing. If you have, you are changing one and need approval.
• Does an automatic procedure cover you? Read the conditions and the disqualifiers before assuming either way, because the answer sets your deadline and your cost.
• When do you want the new year to start? Work backwards from that to the filing date, remembering that the ruling route loses the benefit of extensions.

Answer them in that order. The expensive sequence is the reverse, where a return gets filed on the old year before anyone checks whether the change needed approval.

How FinStackk Helps

A tax-year change touches the filing calendar for two years, not one. Our Fin-Tax module tracks federal, state, county and city deadlines in one place, including the short-period return that follows the change.

If you are aligning a US entity's year-end with a parent company abroad, book a call and we will work through which route applies. The form and its instructions are published on IRS.gov.

Frequently Asked Questions

What is Form 1128 used for?

Form 1128 is the Application to Adopt, Change or Retain a Tax Year. Businesses file it to request IRS approval to move their tax year-end, and partnerships, S corporations, personal service corporations and trusts may be required to use it.

It has two routes: an automatic approval request in Part II for applicants meeting a revenue procedure's conditions, and a ruling request in Part III for everyone else.

Can a company change its fiscal year end?

Yes, though most entities need IRS approval once they have adopted a tax year by filing a return. The request goes on Form 1128, and approval depends on establishing a business purpose for the new year.

A natural business year, measured by the 25% gross receipts test across three years, is the most common way to qualify without a ruling request. A company adopting its first tax year generally needs no approval at all.

Is there a fee to file Form 1128?

Automatic approval requests carry no user fee. Ruling requests do, because the IRS is reviewing your specific facts and issuing a letter ruling on them.

That difference is one reason to test the automatic route first. It costs nothing and moves faster. It also allows extensions, which the ruling route does not.

Related reading

For the filing dates a new tax year will shift, see our US business tax deadlines and forms calendar.