 Income tax 2021-2022, accounting periods and methods. Get ready to get income to the max, dive into income tax 2021-2022. Most of this information can be found in publication 334, Tax Guide for Small Business 2021, income tax formula line number 1, income, noting that we would have a sub-schedule, basically an income statement with income and expenses, basically being deductions the net, then flowing into line 1 of the income tax formula, income and first page of the form 1040 line number 8. So in essence, we would have the schedule C, the net income flowing to schedule 1, which would flow into page 1 of the form 1040 line number 8. This is the schedule C, profit or loss from business, basically an income statement. We're now looking at the accounting periods and methods, which gets into basically bookkeeping type of topics. Now this is another area where as a tax preparer, you would want to be thinking, what kind of clients am I picking up here? Do I want to be picking up more simplified clients? Or do I want to be picking up more complex clients? When I'm picking up, if I am picking up more complex clients, what are the kind of complex clients that I would like to focus in on? Are they going to be business related clients that would have something like a schedule C? And if so, then how much do I want to dive into kind of bookkeeping needs that are going to be questions with regards to that type of business versus just simply doing the data input on the tax side of things, because the accounting methods and periods gets a little bit more into the bookkeeping side of things. So when we start thinking about like accounting methods, we could think about general accounting methods in which are going to be best in general to report income. And then we have accounting methods as are applicable to the tax return with regards to what is allowed to be reported with regards to on the actual tax return. So usually we have like an accrual method and a cash method and then we could kind of have a hybrid of those two methods. But the key is that once you have chosen a method and you've dedicated yourself to that method, you can't change easily you have to basically get authorization to be able to change because the iris is skeptical that if you were to change from say a cash method to an accrual method or some variant thereof, then you would be able to use that to kind of fluctuate your income over the over the cutoff periods, which could kind of adjust your taxes. So the big thing that the iris in my opinion is kind of trying to incentivize is to get to one method, pick that method, stick with that method so that you're held to it over time and you don't have this kind of fluctuation unless there's a need for that fluctuation. We also have a couple of different things that would require people possibly to go to a more complex method, which would be the accrual side of things as opposed to the cash method, one of the big ones being inventory. So if you have a lot of inventory, you would think you're more likely to basically be doing an accrual method because your inventory is usually accounted for kind of like on an accrual basis. Okay. So you must figure your taxable income and file an income tax return for an annual accounting period called a tax year. So it has to be an annual accounting period so we can define, well, what is an annual? It's like 12 months of accounting period that we have to have it. And usually it's going to be the calendar year for a schedule C business, but that's the general rule. Also, you must consistently use an accounting method. So notice consistently as a keyword, an accounting method that clearly shows your income and expenses for the year. So it didn't name the accounting method right there. It just says it needs to be consistent. So publication 538 accounting periods and methods. You can look at that for more information. We have the accounting periods. When preparing a statement of income and expenses, generally your income tax return, you must use your books and records for a specific interval of time called an accounting period. So obviously when we're reporting the income on the income statement, we're looking at the timing statement. If you know financial accounting statements, we have the balance sheet which reports as of a point in time. And we have the income statement which is the performance statement. That is in essence what the schedule C is. Notice we don't have the balance sheet when we're reporting just a schedule C type of business sole proprietorship as we would if we were reporting like a corporation type of entity more likely having both the balance sheet and income statement in that case. So then we need the time period that's covered. Usually going to be what's going to be some kind of year. Oftentimes a calendar year but possible have exceptions. So the annual accounting period for your income tax return is called a tax year. You can use one of the following years, a calendar year or a fiscal year. So the calendar year, January through December, a fiscal year, something other than January to December and that would be the more complex kind of situation generally. Unless you have a required tax year, you adopt a tax year by filling your first income tax return using that tax year. So when you do your first tax return, you're going to lock yourself in to a couple things here because of consistency. So that means you want to make sure you get it right. So if there's something other than the calendar year, you want to make sure you get it right from the start because it's difficult to change because they want consistency. So a required tax year is a tax year required under the internal revenue code or the income tax regulations. So calendar tax year. Calendar tax year is a 12 consecutive months beginning January 1st and ending December 31st. You must adopt a calendar tax year if any of the following apply. So calendar tax year, most likely the tax year that most Schedule C businesses would hear, but you have to have it if the following apply. You do not keep books. So if you don't have any bookkeeping, they're going to default to the calendar year. You have an annual accounting period. So if that's your normal accounting period, you would think that would then be your normal period for the taxes for the Schedule C. The present tax year does not qualify as a fiscal year. Your use of the calendar tax year is required under internal revenue code or the income tax regulations. Calendar tax year. If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. So once again, when you try to change things, then the IRS wants approval because they're going to think that you're trying to shuffle around the income on the cutoff dates to lower taxes, and that's not what they want. For more information, you can see change to change in tax year later. If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1st through December 31st of each year. Then we have the fiscal year, the more complex type of situation generally. A fiscal tax year is 12 consecutive months ending on the last day of any month except December. A 52, 53 week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of the month. So generally, if you think about there's 12 months in a year, there's about 52 to 53 weeks in a year, so they're defining it in the weeks because weeks are a little bit more specific there. And so 52, 53 week time frame, but it doesn't have to end on the last day of the month. So if you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. For more information on a fiscal tax year, include a 52, 53 week tax year. You can see publication 538, so if you have questions about that, the more unusual kind of deviation from the standard calendar year, you can find publication 538 on the IRS website. Change in tax year, so now you're saying, well what if I've already have a tax year set up and I want to change it? Well the IRS doesn't like that, but you got to have like a good reason. I've got a good reason IRS, listen to this, this is why I want to change it, that kind of thing. So generally, you must file form 1128 application to adopt change or retain a tax year to request IRS approval to change the tax year. Again, this is why it's very important to try to get things lined up the way you want them lined up in year one, so that you can remain consistent throughout, but if that didn't happen or you can blame the prior accountant, the prior accountant messed it up and now we got to fix everything, then you do this. So see the instructions for form 1128 for exceptions. If you qualify for an automatic approval request, a user fee is not required. If you did not qualify for automatic approval, a ruling must be requested. See instructions for form 1128 for information about user fees if you are requesting a ruling.