Frequently Asked Questions
Who is eligible for the Alternative Short Period Tax Computation?
Taxpayers filing a short-period return due to a change in annual accounting period who apply for this benefit within the regulatory timeframe.
How does the Alternative Short Period Tax Computation work?
Provides an alternative tax computation for a short period return resulting from a change in accounting period. It allows the tax to be reduced to a proportion of the tax that would have been due over a full 12-month period, preventing artificially high tax brackets caused by annualizing short-period income.
What law authorizes the Alternative Short Period Tax Computation?
The Alternative Short Period Tax Computation is authorized under IRC §443(b)(2) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §443
Source: Internal Revenue Code, Title 26, United States Code
§ 443. Returns for a period of less than 12 months(a) Returns for short periodA return for a period of less than 12 months (referred to in this section as “short period”) shall be made under any of the following circumstances:(1) Change of annual accounting periodWhen the taxpayer, with the approval of the Secretary, changes his annual accounting period. In such a case, the return shall be made for the short period beginning on the day after the close of the former taxable year and ending at the close of the day before the day designated as the first day of the new taxable year.
(2) Taxpayer not in existence for entire taxable yearWhen the taxpayer is in existence during only part of what would otherwise be his taxable year.
(b) Computation of tax on change of annual accounting period(1) General ruleIf a return is made under paragraph (1) of subsection (a), the taxable income for the short period shall be placed on an annual basis by multiplying the modified taxable income for such short period by 12, dividing the result by the number of months in the short period. The tax shall be the same part of the tax computed on the annual basis as the number of months in the short period is of 12 months.
(2) Exception(A) Computation based on 12-month periodIf the taxpayer applies for the benefits of this paragraph and establishes the amount of this taxable income for the 12-month period described in subparagraph (B), computed as if that period were a taxable year and under the law applicable to that year, then the tax for the short period, computed under paragraph (1), shall be reduced to the greater of the following:(i) an amount which bears the same ratio to the tax computed on the taxable income for the 12-month period as the modified taxable income computed on the basis of the short period bears to the modified taxable income for the 12-month period; or
(ii) the tax computed on the modified taxable income for the short period.
The taxpayer (other than a taxpayer to whom subparagraph (B)(ii) applies) shall compute the tax and file his return without the application of this paragraph.
(B) 12-month periodThe 12-month period referred to in subparagraph (A) shall be—(i) the period of 12 months beginning on the first day of the short period, or
(ii) the period of 12 months ending at the close of the last day of the short period, if at the end of the 12 months referred to in clause (i) the taxpayer is not in existence or (if a corporation) has theretofore disposed of substantially all of its assets.
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