Should You Adopt a Fiscal or Calendar Year for Your Small Business?
As an individual taxpayer, you’re required to complete and submit an annual federal income-tax return by April 15 for the prior calendar year. (The IRS sometimes moves the date to avoid Sundays and holidays.) However, if you’re a small-business owner, your tax year doesn’t necessarily end on Dec. 31.
There are two types of years under which a business may operate: calendar or fiscal. It’s easiest to choose which option is most appropriate for your company the first time you file, because you’ll need special permission to make adjustments later.
Here’s some background on both — and why you might pick a fiscal over a calendar year.
According to the IRS and standard convention, a calendar year consists of the 12 consecutive months that start on Jan. 1 and end on Dec. 31. Individuals and most small businesses file their income-tax returns based on this calendar year.
The IRS requires you to file taxes based on a calendar year if any of the following are true:
- You don’t keep company records or books;
- You have no annual accounting period;
- Your present tax year doesn’t qualify as a fiscal year; or
- Other IRS rules require you to use a calendar year.
A fiscal year is any 12-month period that ends on the last day of any month except December. Companies that operate under a fiscal year therefore may start their year on the first day of any month except January, provided that the year comprises 12 full, consecutive months.
If you own a seasonal business, a calendar year might split your season — along with all income and expenses — into two tax years, making accounting metrics more difficult to compare. How confusing would it be to look at your profit and loss statement knowing that it reported income and expenses from two separate seasons? Adopting a fiscal year allows you to keep your selling season on the same tax return, as well as on the same year in your books.
If you run a seasonal business but aren’t permitted to adopt a fiscal year, accounting apps like QuickBooks and QuickBooks Online allow you to run reports with customizable date ranges. This won’t make your tax returns less confusing, but it will provide a valuable tool for comparing sales periods.
How and When to File
According to the IRS, your business tax year is established by filing your first tax return using that tax year. If you file your business return as part of your personal return, you'll establish a calendar year as your reporting period. If you're eligible and choose to establish a fiscal year, the 12-month reporting period you indicated on your business return establishes your fiscal year.
If you elect a fiscal year, you are required to file your tax return by the 15th day of the fourth month after the close of your fiscal year. If your fiscal year ends on June 1, you have until October 15 to file your return. In other words, if your fiscal year starts March 1 and ends on Feb. 28, you must file taxes by May 15.
If your company grows and you later become a partnership, corporation, or other designation, you may not change your tax year without special permission from the IRS. You’ll need to file IRS Form 1128 [PDF]; depending on your business, you may have to request an IRS ruling and pay the related fee.
The IRS estimates [PDF] that non-tax professionals will need more than 21 hours to complete Form 1128 (and related activities) properly. It’s likely a better use of your time to hire an accountant, an attorney, or a tax professional to handle the task for you.