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Changing Year End for Cooperatives

Cooperatives sometimes consider changing their year end to a new month or to a 52-53 week year ending on the same month. Most cooperatives seem to start up with a December year end. Larger food cooperatives gravitate to a June year end.

One general guideline on choosing a year end is that the year should end on the strongest quarter or begin on the weakest quarter.

Beginning on a weaker quarter allows more effort to be spent on wrapping up the year-end financial statements. Before changing to a 52-53 week year be sure your software can handle it and that you define what the year-end will be. The most common is the Sunday closest to the month end.

The Internal Revenue Service tightly regulates year ends of all tax return filers. Corporations are allowed to start up with their year ending on any month, and with a 52-53 week year, although they may be restricted from subsequently changing this to another month or to a 52-53 week year if they did not start with one. Other types of entities such as S-Corporations and partnerships are generally required to have a December year end and are not allowed to change. Note that the IRS does not allow entities to use different year ends for tax and for book purposes.

IRS Form 1128 must be filed to request any change in year-end. It is preferable to qualify for an automatic change in year-end since this does not require extensive documentation or a fee. The specifics of changing year-end are in IRS Revenue Procedure 2006-45.

Cooperatives have a significant constraint on automatic changes in year end which is that they need to have a profit in the period of the change to qualify (Revenue Procedure 2006-45, 4.02 (11)).

This applies to changing the month the year ends but it does not apply to changing to or from a 52-53 week year on the same year end. If the period of change is profitable there is no restriction on changing year end. If the period of change is not profitable the co-op can only automatically change year end if the membership is more than 90% the same from the prior period to the short period. This may be a difficult test for food coops to meet.

If the cooperative qualifies for an automatic change in year end the Form 1128 cannot be filed until the period of change has ended. The Form 1128 must be filed by the extended due date of the tax return for the period of change. The Form 1128 is filed separately with the IRS and also attached to the income tax return for the period of change.

Because of the chance for problems with the IRS timely processing the Form 1128 filed we recommend that the form be filed as soon possible after the period of change.

In addition the Form 1128 should be delivered directly to an IRS office or, at a minimum, sent by certified mail. Should the IRS lose the Form 1128 you will not be allowed to use the new year end. If the IRS receives and processes the Form 1128 they will send a notice accepting or denying the request.

If the cooperative decides to change its year end and it does not qualify for the automatic change procedures in Revenue Procedure 2006-45, it must file Form 1128 requesting a ruling using the procedures in Revenue Procedure 2002-39. This requires an extensive presentation of facts about why changing the year end has a substantial business purpose. The IRS fee for this determination is outlined in Revenue Procedure 2015-1 and is currently $4,200.

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