A Section 444 election lets a partnership, S corporation, or personal service corporation use a fiscal year end that differs from the tax year the Internal Revenue Code would otherwise force it to use, without having to prove a business purpose. The trade-off: the elected year can defer income no more than three months, and the entity has to keep up with an annual payment or distribution requirement for as long as the election is in place. Miss the compliance step once and the election can end permanently.
Who Can Make the Election
Three entity types qualify: partnerships, S corporations, and personal service corporations (PSCs). Each is otherwise locked into a “required taxable year.” Partnerships generally must use the tax year of their majority-interest partners. S corporations and PSCs generally must use a calendar year. Section 444 is the workaround for entities that want a different year end but cannot establish a natural business year or other business-purpose justification. Entities that already have business-purpose approval for their fiscal year do not need this election at all.
What Fiscal Year Ends Are Allowed
The elected fiscal year cannot create a deferral period longer than three months. The deferral period is the gap between the end of the elected fiscal year and the end of the required tax year. For an entity whose required year end is December 31, the earliest permissible fiscal year end is September 30, which produces the maximum three-month deferral. October 31 and November 30 are also permissible, giving two-month and one-month deferrals.
An entity changing an existing tax year faces a tighter rule: the new year’s deferral period cannot exceed the shorter of three months or the deferral period of the year being changed. An entity moving away from a November 30 year end (a one-month deferral) cannot jump to September 30. It can only elect a year with a one-month or shorter deferral.
How to File Form 8716
The election is made on IRS Form 8716, “Election To Have a Tax Year Other Than a Required Tax Year.” The form asks for the entity’s name, EIN, the elected tax year end, and a signature.
File it by the earlier of two dates: the 15th day of the fifth month after the month containing the first day of the tax year for which the election takes effect, or the due date (without extensions) of the income tax return for the tax year resulting from the election. A calendar-year partnership electing a September 30 year end, for example, faces a May 15 deadline under the first rule.
Automatic 12-Month Extension If You Miss the Deadline
Missing the filing deadline is not fatal. Treasury Regulation Section 301.9100-2 grants an automatic 12-month extension. To use it, type or print “Filed Pursuant To Section 301.9100-2” at the top of Form 8716 and file within 12 months of the original due date. No private letter ruling and no separate IRS approval is required.
Annual Payment for Partnerships and S Corporations
Partnerships and S corporations that make the election must file IRS Form 8752, “Required Payment or Refund Under Section 7519,” every year the election is in effect. The payment offsets the tax deferral the owners get from the fiscal year. The IRS holds the running balance interest-free.
How the Payment Is Calculated
Start with Net Base Year Income (NBYI). The base year is the most recent fiscal year preceding the current election year. NBYI equals the deferral ratio multiplied by the entity’s net income for the base year, plus an adjustment for applicable payments. The deferral ratio is the number of months in the deferral period divided by the total months in the tax year. A September 30 year end gives a 3/12 ratio.
Applicable payments are amounts the entity pays that end up in a partner’s or shareholder’s gross income. The term excludes gains from property sales between the entity and its owners, dividends paid by S corporations, and guaranteed payments to partners. Guaranteed payments come out of both the applicable payments figure and the net income figure, and that is where a lot of preparers slip, assuming those payments get added back.
The required payment equals NBYI multiplied by the adjusted highest Section 1 rate, which is the top individual income tax rate at the end of the base year plus one percentage point. When the top individual rate is 37%, the adjusted rate is 38%.
Compare the gross required payment to the cumulative balance already on deposit with the IRS. If the current-year figure is higher, pay the difference. If it is lower, claim a refund of the overage.
The $500 De Minimis Rule
Section 7519 only applies if the required payment for the current year or any preceding year exceeds $500. Below that, no deposit is owed. The entity still files Form 8752 to report the calculation but sends no money.
When Form 8752 Is Due
Form 8752 is due May 15 of the calendar year following the start of the applicable election year. For election years beginning in 2025, the form and any payment are due May 15, 2026. The deadline is the same regardless of which fiscal year end you elected. Form 8752 is separate from your Form 1065 or Form 1120-S income tax return. Missing it is not just a penalty risk; it can terminate the election.
Annual Distribution Rule for Personal Service Corporations
PSCs do not file Form 8752. Their yearly obligation runs through Section 280H’s minimum distribution requirement, and the penalty for missing it is a limit on how much the PSC can deduct for amounts paid to its employee-owners, not a cash deposit.
The Minimum Distribution Test
A PSC meets the requirement if applicable amounts paid to employee-owners during the deferral period equal or exceed the lesser of two benchmarks. The first is a preceding-year test: applicable amounts paid during the prior tax year, divided by the number of months in that year, multiplied by the number of months in the prior year’s deferral period. The second is a three-year average: total applicable amounts paid over the three preceding tax years divided by adjusted taxable income for those years (capped at 95%), then applied to the deferral period’s adjusted taxable income.
“Applicable amounts” are compensation and other payments to employee-owners that show up in their gross income. Gains from property transactions between the owner and the corporation, and dividends, are excluded.
What Happens If You Fail the Test
The PSC’s deduction for applicable amounts paid to employee-owners is capped at the “maximum deductible amount,” calculated on Schedule H of Form 1120 and attached to the corporation’s income tax return. The disallowed deduction carries forward and is treated as paid in the next tax year. The deduction is delayed, not lost. A PSC with a Section 444 election in effect also cannot carry back net operating losses to or from any election year. And a willful failure to comply with Section 280H terminates the Section 444 election itself.
Tiered Structures Are Disqualified
An entity that is part of a tiered structure cannot make or keep a Section 444 election under Treasury Regulation Section 1.444-2T. An entity is in a tiered structure if it directly owns any portion of another deferral entity (partnership, S corporation, PSC, or trust), or if a deferral entity directly owns any portion of it. Limited exceptions exist, but the general rule catches enough situations that any entity with ownership ties to other pass-throughs should check this before filing Form 8716.
How the Election Ends
A Section 444 election stays in effect until something terminates it, and once terminated it cannot be made again. The statute contains no waiting period; the ban is permanent. That is what makes the annual filings genuinely high-stakes.
Voluntary Termination
An entity can switch back to its required tax year at any time by filing a short-period return. Print “SECTION 444 ELECTION TERMINATED” at the top of that return. A PSC changing to its required year must also annualize income for the short period.
Involuntary Termination
The election ends automatically when the entity stops qualifying. Common triggers include revoking S status, liquidating, a PSC’s willful violation of Section 280H, and, for partnerships and S corporations, failing to file Form 8752 and make the required payment on time. That last one is the trap. A single missed May 15 filing can permanently end the election.
Getting Your Deposits Back
When the election terminates, partnerships and S corporations get a full refund of the accumulated required payment balance. Claim it by filing Form 8752 for the year of termination. Because the deposits were interest-free, the IRS returns only principal.