The IRS has established various rules regarding required tax years in order to prevent excess deferral of taxes by partnerships, S corporations, and personal service corporations. In certain circumstances, however, under Internal Revenue Code Section 444, partnerships, S corporations, and personal service corporations may elect to use a tax year other than their required tax year, subject to certain limitations. This article will explain the basics of Section 444 elections. It is not intended to constitute tax or legal advice.
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In general, a partnership, S corporation, or personal service corporation can make a section 444 election provided that it meets the following requirements: (1) it is not a member of a “tiered structure” (defined below), (2) it has not previously made a section 444 election, and (3) it elects a tax year that meets IRS deferral period requirements.
A tiered structure is defined in 26 C.F.R. § 1.444-2T: “—(1) In general. A partnership, S corporation, or personal service corporation is considered a member of a tiered structure if— (i) The partnership, S corporation, or personal service corporation directly owns any portion of a deferral entity, or (ii) A deferral entity directly owns any portion of the partnership, S corporation, or personal service corporation.”
Determination of the Deferral Period
The deferral period is determined by whether a partnership, S corporation, or personal service corporation is adopting or changing its tax year by making a section 444 election, or whether it is retaining its tax year.
For partnerships, S corporations, or personal service corporations adopting or changing to a tax year other than its required year, the deferral period is the number of months after the end of the new elected tax year to the end of the required tax year.
If a partnership, S corporation, or personal service corporation makes a Section 444 election to retain its tax year, the deferral period must be three months or less, determined by the number of months from the start of the tax year to be retained and the end of the first required tax year.
Making a Section 444 Election
Form 8716 must be filed in order to make a Section 444 election. In general, the form must be filed by the earlier of the due date (not including extensions) of the elected tax year or the 15th day of the 6th month of the tax year for which the Section 444 election will go into effect. Form 8716 should be attached to Form 1065, Form 1120S, or Form 1120 for the first elected tax year. A Section 444 election will remain in effect until terminated.Required Payments
A partnership or an S corporation making a Section 444 election must also file Form 8752, “Required Payment or Refund Under Section 7519” for every year that the election is in effect. If the required payment is greater than $500, the payment must be made when the form is filed. A personal service corporation must distribute required amounts to its employee-owners by December 31st of each elected Section 444 tax year.
IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.