Choosing a fiscal year as your tax year option may prove more beneficial than the traditional calendar year if your small business is seasonal. However, the IRS must grant permission.
What’s a tax year?
The IRS defines “tax year” as an accounting period for keeping records and reporting income and expenses. A business must figure taxable income on the basis of a tax year. You might choose a short tax year of less than 12 months when, as a taxable entity, you are not in existence for an entire tax year, or you change your accounting period. Tax on a short period tax return is figured differently for each situation.
What is the definition of “fiscal year”?
Investopedia defines a fiscal year (FY) as a period that a company or government uses for accounting purposes and preparing financial statements. Fiscal years are commonly referred to when discussing budgets and are often a convenient period to reference when comparing a government’s or company’s financial performance over time. A fiscal year might not be a calendar year, and for tax purposes, the IRS allows companies to be either calendar-year taxpayers or fiscal-year taxpayers.
What’s the difference between being a fiscal year taxpayer and a calendar year taxpayer?
A fiscal year is 12 consecutive months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks, but does not have to end on the last day of the month. Most businesses using a fiscal year are C corporations along with certain limited liability companies (LLCs) or S corporations which have presented a justifiable reason to the IRS. Sole proprietorship businesses are the exception, and cannot use this option. TIP: Most businesses that change their fiscal year keep their end dates aligned with the start and end of a typical business quarter: March 31, June 30, September 30 and December 31.
A calendar year is 12 consecutive months beginning January 1 and ending December 31. Most small businesses use the calendar year, and the IRS actually requires that certain entity types use the regular calendar year. Generally, these are flow-through, or pass-through business entities that are closely tied to their owners and their individual tax calendars. These flow-through entitles include sole proprietors and partnerships, LLCs and S corporations.
When should you decide whether your business is a fiscal year or calendar year taxpayer?
Generally speaking, you’ll choose for your business to be a calendar year taxpayer. This decision is usually made when you set up your business.
Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. A required tax year is a tax year required under the Internal Revenue Code and the Income Tax Regulations. You have not adopted a tax year if you merely did any of the following.
Filed an application for an extension of time to file an income tax return.
Filed an application for an employer identification number.
Paid estimated taxes for that tax year.
If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or meet one of the exceptions listed in the instructions to Form 1128, Application To Adopt, Change, or Retain a Tax Year (PDF).
Generally, anyone can adopt the calendar year. However, if any of the following apply, you must adopt the calendar year.
You keep no books or records;
You have no annual accounting period;
Your present tax year does not qualify as a fiscal year; or
You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.
Why choose fiscal year taxpayer?
Operating under a fiscal year is more complicated than a calendar year and generally always requires the services of a CPA. If your business relies on seasonal or holiday trends, a fiscal year might be best. An example is a farming business where most of the income is seen in the spring. Expenses are heavily incurred during the fall. This business could possibly be better handled with a tax year ending in July or August rather than a calendar tax year ending in December. A fiscal year would allow income and expenses on each tax return to be more closely related.
Make your decision carefully. Once taxes have been filed, the IRS requires a valid case be made for the change. If your business is seasonal, you could have a very good case for making the change.
The bottom line.
If you have questions about the structure of your business or your original decision as to whether your business is a fiscal or calendar year taxpayer, let’s talk about this. As your CPA firm, we’re concerned and available to assist you in this and many other decisions you will continue to make as a business owner.
We establish and maintain a business and personal relationship with our clients. We know that your Your BUSINESS is Your Life, and your LIFE is Your Business, and we take both seriously.
Contact Melanie Radcliff CPA, Inc
Call 479.478.6831 or send us an email
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