D is corrent. The requirement is to determine which entity is free to adopt any tax year it chooses. A C corporation is free to adopt a calendar year or any fiscal year that it chooses. On the other hand, restrictions apply to the adoption of a taxable year by S corporations, limited liability companies, and trusts in order to prevent the deferral of income to owners and beneficiaries that could otherwise be achieved. An S corporation’s income is generally passed through to shareholders at the end of the S corporation year. As a result, an S corporation generally must adopt a calendar year, and can request permission to adopt a fiscal year only if the corporation establishes a business purpose. A limited liability company (LLC) that does not elect to be taxed as an association is a partnership for tax purposes and is subject to the same restrictions regarding the adoption of a taxable year that apply to other partnerships. Generally, an LLC must adopt the same taxable year as used by its one or more owners who have an aggregate interest in LLC profits and capital exceeding 50%. Distributions from trusts are taxed to beneficiaries in the beneficiaries’ tax year in which the trust’s year ends. As a result, trusts are generally required to adopt a calendar year.
A is incorrect. A trust must generally adopt a calendar year.
B is incorrect. An S corporation must generally adopt a calendar year.
C is incorrect. An LLC must generally adopt the same taxable year as is used by more than 50% of its owners.
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