Form 1128 - change tax year to calendar year

[jeanniee]

New client files 1040. Has been filing fiscal year ending October. Wants to change to calendar. I'm reading instructions for form 1128. Exceptions to filing 1128, page 1: An individual who does not have an interest in a pass-through entity changing to a calendar year. My client meets this exception. Am I reading this right? Will he be required to file form 1128? If not, does he just make the change and go forward as a calendar year filer? Thank you.

[Snaggletooth]

My best guess

based on some experience and other reading I have done:

If this is not a "pass-through" entity, and the current arrangement has a year-end of Sep 30th:

If taxpayer wishes to convert to a calendar year, then:
1) He first needs to file a "short-year" for Oct, Nov, Dec of the final year before the change. Essentially the full-year tax rates are assessed against "annualized" income, i.e. if these three months have profit of $50,000, the tax percentage rate is the same as profit on $200,000, except the rate is applied only to $50,000. There are various versions of annualization which make the calculation less straightforward, but this is the gist of the tax assessment.
2) He then begins the next year as a calendar year and pays taxes on a full year of income.

As far as I know, there is no such thing as a "long" reporting year of 15 months. The short year means double-accounting and tax-preparation costs, possibly inventories, etc. and this may make the whole idea unattractive to the client.

[Roland Slugg]

Will he be required to file form 1128?

No, because as you correctly said he meets one of the exceptions to filing F-1128. This assumes, of course, that the individual does not own an interest in any pass-through entities ... i.e. partnerships or S Corporations (maybe trusts, as well, not sure about that).

If not, does he just make the change and go forward as a calendar year filer?

No way! He has to file a "short year" return covering the period from November 1, 2016 to December 31, 2016, following the procedures for "annualizing the income and tax for that short period. Then he will file a calendar year return in the usual way starting with the year 2017.

Personal note: I have been in the tax business for a long time ... almost 100 years ... and have never had a client or even run across anyone with a fiscal year. So, congratulations to you for having one!! I don't think there are very many.