ASSOCIATION'S TAX YEAR END - WHY AND HOW TO CHANGE IT
By: Gary A. Porter, CPA
Since most associations do not seem to have any natural business cycle or year-end, it really matters little what month an association selects as its accounting year end. Unfortunately the vast majority of associations seem to have selected December 31 as their year-end. I say "unfortunately" because December 31 is also the prescribed year end for virtually all individual taxpayers, partnerships, "S" corporations and personal service "C" corporations. Corporation tax returns for corporations with calendar year ends are due on March 15th, and individual and partnership returns are due on April 15. This places a tremendous burden on the CPAs to do a lot of work in a very short period of time. It is not unusual to discover that with many CPA firms, they will provide one-half of their services for the entire year by April 15 of each year. This is even more compressed than it would appear when you realize that most association records or business records of other taxpayers are not available to the CPA until at least January 15th of each year. Thus, in a three month period of time, the CPA must do one-half years work, if the CPA is to meet filing deadlines.
By selecting a 12/31 year-end, an association unnecessarily positions its tax, accounting and auditing work into the busiest period in the accountant's work cycle. Many CPAs are suggesting that those clients who are able to change their year end to a month other than December do so. This has advantages for the association. It helps the CPA ensure that the association will receive prompt, quality service if the work is done outside the peak work load period of January 15 through April 15. Some associations may also discover that their CPA's are charging them a premium rate, because the work must be done during the CPA's busiest time of the year, whereas, the CPA might be able (at least in a minor amount) to negotiate fees at other times of the year when there is less pressure upon his or her staff.
While most associations are reluctant to change their tax year once it has been established, it is in fact a very painless process. The procedure for changing a tax year is indicated in Treasury Regulation 1.442-1(c). Virtually all associations would meet the Commissioner's conditions for the ability to change their year-end without advance approval from the Commissioner of the Internal Revenue Service. The conditions basically would be as follows:
- The association has not changed its annual accounting period at any time within the 10 calendar years ending with the calendar year which includes the beginning of the short period required to effect the change.
- The short period is not a tax year in which the association has a net operating loss under IRC Section 172.
- The taxable income of the short period after being annualized is not less than 80% of the taxable income of the immediately preceding tax year.
The association must either file Form 1128 "Application to Adopt, Change, or Return to Tax Year," or if it meets the conditions described above, file the short period tax return with a statement that the conditions are met, and specifying the new tax year.
Most associations' controlling documents specify the requirement for completion of year-end financial statements of the association. Some states such as California have more stringent requirements, whereby the association documents must be delivered to members within 75 days after the association's year end. (California Civil Code Section 1365)
Some association documents may specify that their year is to be the calendar year. Such documents also will specify the requirements for making modifications to those documents. Changing the documents will probably be infinitely more difficult than changing the year end for tax purposes. If the association documents do not specify a year end, then the tax year may be whatever is selected by the association. For tax purposes the tax year is dependent not upon the wording in association governing documents, nor any other factor except the year that is selected by the filing of the first year's tax return. New associations may wish to consider selecting a year end other than December 31 on their first tax return. Regrettably, many times the developer will still have control of the association for more than twelve months since the initial incorporation of the association. This means that in most instances the developer will be determining the year end, rather than an elected board of directors, and the developer has little incentive to consider future problems in obtaining professional services when selecting the year end. As pointed out earlier, however, the association can change its year-end relatively easily if the developer has defaulted to the 12/31 year-end.