Average annual gross receipts of more than 5 million

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average annual gross receipts of more than $5 million. (1) “Average annual gross receipts” is the average of gross receipts for the 3 prior tax years ending immediately before the tax period in question. (2) Change to the accrual method is required in the first year after the partnership’s “average annual gross receipts” exceed $5,000,000. The accrual method must be used thereafter. Taxable Year of the Partnership 27. Partnership income flows through to each partner at the end of the partnership’s taxable year. Thus, partners include their distributive share of partnership income for the partnership year that ends within the partner’s tax year. 28. To prevent excessive deferrals, § 706(b)(1) requires that the tax year of a partnership be determined by systematic reference to the partners’ tax years. The partnership’s tax year is determined in the following order. Tax year of the majority partners with the same tax year (i.e., partners with a more than 50% aggregate profit and capital interest).
Tax year of all principal partners (i.e., all partners with a 5% or greater profit or capital interest have the same year-end). Year determined under the least aggregate deferral method (Figure 10.2 and Example 20 in text). 29. If partners are dissatisfied with required year-end, they may petition IRS for permission to use another tax year if they meet either of the following requirements. a. Establish to the satisfaction of the IRS that a business purpose exists for selecting an alternate tax year; usually selecting a natural business year-end. (1) A natural year end occurs when 25% or more of the gross receipts occur in the last two months of a 12-month period for three consecutive years. (2) If the partnership satisfies this test, it can adopt the last month of this 12- month period as its fiscal year. (3) If the partnership cannot meet this test, it may be very difficult to establish a business purpose that satisfies the IRS. b. Elect a year-end that provides no more than a three month deferral under § 444. (1) Existing partnerships may also elect under § 444. This election is automatic, that is, if the partnership meets the requirements, the IRS will not disallow the year-end. (2) Under this election, the partnership must maintain a tax deposit account based on the deferred portion of partnership income. The deposit is based on the highest individual tax rate, plus 1% (36% total), so the cost of this election may be prohibitive. Did you know? Rev. Proc. 2006-46, 2006-2 CB 859, provides some administrative rules on the taxable year issue. Among the rules affecting the “required” taxable year are the following: Partnerships may elect or change their taxable year-ends to a “required” taxable year without obtaining IRS approval. A partnership using a taxable year that corresponds to its “required” taxable year generally must obtain the approval of the IRS to retain the taxable year if its “required” taxable year changes because of a change in ownership. A partnership desiring a natural business year is affected by the following rules: A partnership can automatically adopt a natural business year that satisfies the 25%

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