Corporate Accounting Periods

Division 2, Part 11, Chapter 13 deals with accounting periods and methods of accounting under the California Corporation Tax Law. Article 1 deals with accounting periods.

Section 24631 provides that income is computed on the basis of the taxpayer’s taxable year. Also, income is computed on the basis of both the preceding income year and the current taxable year. The terms “income year” and “taxable year” are defined.

Section 24632 states that the taxable year of a taxpayer may not be different than the taxable year used for purposes of the Internal Revenue Code, unless initiated or approved by the FTB, or otherwise required.

Section 24633 specifies that, if a taxpayer changes its annual accounting period, the new accounting period becomes the taxpayer’s taxable year only if the change is approved by the FTB.

Section 24633.5 provides that, in the case of any “S corporation” or personal service corporation required to change its accounting period by the federal Tax Reform Act of 1986, that change is treated as initiated by the “S corporation” or personal service corporation with the consent of the FTB.

Section 24634 explains that a return for a period of less than 12 months (referred to in this article as “short period”) is made under any of the four specified circumstances. This section applies whether or not a federal return is required to be filed for a period of less than 12 months.

If a return is required to be filed under this section for a period of less than 12 months, that period is deemed to be a taxable year.

Section 24636 states that, if a separate return is made by a taxpayer subject to the tax on account of a change in the accounting period, the net income computed on the basis of the period for which the separate return is made, referred to in this section as “the short period,” is placed on an annual basis by multiplying the amount thereof by 12, and dividing by the number of months in the short period.

The FTB computes the amount of a tax on the income placed on the annual basis, and allows the offset provided for from the tax. The tax due under this section, which is subject of offset, is part of the tax, less the offset allowed, computed on an annual basis as the number of months in the short period is of 12 months.

If a taxpayer subject to the tax imposed establishes the amount of its net income for the period of 12 months beginning with the first day of the short period, computed as if the 12-month period were a taxable year, under the law applicable to the year, then the tax for the short period must be reduced to an amount which is part of the tax computed on the net income for the 12-month period as the net income computed on the basis of the short period.

Section 24637 states that, for taxable years beginning on or after January 1, 1987, Section 444 of the Internal Revenue Code, relating to election of taxable year other than required taxable year, is applicable, except as specified.

Article 2 deals with methods of accounting.

Section 24651 provides that income is computed under the method of accounting on the basis of which the taxpayer regularly computes its income in keeping its books. If no method of accounting has been regularly used by the taxpayer, or if the method used does not clearly reflect income, the computation of income is made under the method as, in the opinion of the FTB, does clearly reflect income. A taxpayer may compute income under any of the specified methods of accounting.

Section 24652 states that Section 447 of the Internal Revenue Code, relating to method of accounting for corporations engaged in farming, applies. The amendments made by Section 13102(a) of the Tax Cuts and Jobs Act to Section 447 of the Internal Revenue Code, relating to method of accounting for corporations engaged in farming, apply. Any change in method of accounting made pursuant to this subdivision is treated as initiated by the taxpayer and made with the consent of the FTB.

Section 24652.5 states that Section 447(i)(3) of the Internal Revenue Code, relating to reduction in account if farming business contracts, does not apply. Section 447(i)(4) of the Internal Revenue Code, relating to income inclusions, does not apply. No suspense account may be established under Section 447(i) of the Internal Revenue Code, relating to suspense account for family corporations, by any corporation.

Section 24652.6 specifies that amendments made by Section 13102(e)(2) of the Tax Cuts and Jobs Act, relating to preservation of suspense account rules with respect to any existing suspense accounts, applies to any suspense account existing as of the effective date of the act adding this subdivision that was not otherwise precluded.

Any change in method of accounting made pursuant to this section is treated for purposes of applying Section 24721, as initiated by the taxpayer and made with the consent of the FTB. Section 13102(e)(1) of the Tax Cuts and Jobs Act (Public Law 115-97) does not apply.

Section 24654 states that Section 448 of the Internal Revenue Code, relating to limitation on use of cash method of accounting, applies. Sections 801(d)(2), 801(d)(3), and 801(d)(5) of the Tax Reform Act of 1986 (Public Law 99-514), apply. The amendments made by Section 13102(a) of the Tax Cuts and Jobs Act to Section 448 of the Internal Revenue Code, relating to limitation on use of cash method of accounting, applies.