How to Determine Your Company's Fiscal Year
How to Set Your Business Tax Year
Every business has a fiscal year. A company's fiscal year is its financial year; it is any 12-month period that the company uses for accounting purposes. The fiscal year is expressed by stating the year-end date. A fiscal year-end is usually the end of any quarter, such as March 31, June 30, September 30, or December 31.
To confuse the issue, the IRS says a fiscal year is "12 consecutive months ending on the last day of any month except December."
What Is the Difference Between a Fiscal Year and a Tax Year?
Your business tax year is the period you use to figure your business taxes. The IRS distinguishes "fiscal year" from "tax year," stating that a tax year can be either a fiscal year or the calendar year.
You don't have to select a tax year for you business; you can just file your first income tax return using that tax year.
For tax year purposes, the IRS says you can use either of these two years as your business tax year:
- A calendar year: January 1 to December 31
- Your company's fiscal year.
If your fiscal year ends on December 31, you're using a calendar year as your business tax year.
Your business fiscal year is almost always your tax year, but it doesn't have to be. A corporation with a March 31 fiscal year-end may also file a corporate income tax return, effective March 31.
Fiscal Year vs. Tax Year
Your business fiscal year is internal. At the end of your fiscal year, you report on your business financial situation to your shareholders, or just to yourself.
Your business tax year is external: It's the 12-month period you report on to the IRS for tax purposes.
Why Does My Company's Fiscal Year Matter?
It depends on the type of business you own. If you have a seasonal business that has highs and lows in sales and activity, you may decide you want to have your business fiscal year be the end of the quarter after the activity has ended. This makes it easier to see how your business has done for the year.
For example, a retail business that does all its sales over the holidays may want a December 31 year-end.
How Is My Company's Fiscal Year Used?
Your fiscal year is primarily used for tax purposes. Some types of businesses file their income taxes on a fiscal year basis, rather than a calendar year basis.
Fiscal year-end is also used to determine the filing dates and due dates for extensions.
Do I Have to Have a Specific Fiscal Year, by Law?
Your business can have any fiscal year you want, depending on your business type, as described above. But it's almost impossible to have NO fiscal year because the IRS will ask you for this date.
A business taxed as a sole proprietorship (which files its business income tax return on Schedule C), must use December 31 as the business tax year. Because single-member LLC's are taxed as sole proprietorships, they must also use a December 31 business fiscal year.
Some businesses – partnerships, S corporations, and personal service corporations – must use a specific tax year. If a business wants a different tax year, it must file an election with the IRS.
A partnership must conform its tax year to the tax year of the partners.
S corporations can use one of the permitted permitted tax years, but the calendar year is the only one you can use without filing an election.
A personal service corporation must use a calendar year unless they elect one of the exceptions.
A corporation sets its tax year when it files its first tax return.
These tax year regulations are complex, so check with your tax professional before you make a decision or election.
Generally, anyone can adopt the calendar year as their tax 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.
- You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.
Just to be even more confusing, on the application for your Employer ID Number (EIN), the IRS asks for the closing date of your business's "accounting year." An accounting year can be either a calendar year or a fiscal year as the IRS defines it (above). If you aren't using a calendar year for your fiscal year, check with the accountant before answering this question.
What Is the Best Date for My Fiscal Year-End?
Businesses usually consider two criteria for setting a fiscal year end:
- Type of business: A sole proprietorship or a business that is taxed as a sole proprietorship (single-member LLC, for example) must use a December 31 fiscal year-end to match the personal tax year-end.
- Business cycle: If your business is not taxed as a sole proprietorship, you can choose the end of any quarter for your fiscal year-end. Most companies base their fiscal year-end on the business cycle for their industry, choosing the end of the busiest time for their fiscal year-end.
Some examples: Companies that do most of their business in the summer might choose a September 30 year-end. If your business does a lot of work with the U.S. government, you might choose a September 30 year-end to coincide with the federal government's fiscal year-end. If your business does most of its selling during the holidays, you might choose December 31.
How Do I Change My Company's Fiscal Year or Tax Year?
Since a fiscal year is an internal matter, your business can make changes in the fiscal year according to your corporate by-laws, any partnership or LLC agreements, or by other means (consult your legal advisor).
If you change your fiscal year, you must change your tax year. If you want to change your tax year, you must have IRS approval. The general form used to change a tax year is IRS Form 1128 - Application to Adopt, Change, or Retain a Tax Year.
If your business is a partnership, S corporation, or personal services corporation, you may need to use IRS Form 8716 to change your tax year to a year other than the required tax year.
Changing your business tax year or fiscal year may be more complicated than it seems. IRS Form 1128, for example, is long and confusing. Get help from a tax attorney or other tax professional if you want to change your tax year.
What About a Short Year?
Your business may have a short tax year if you
- Start your business,
- End your business or
- Change your tax year during a year.
A short tax year is just a year that's less than 12 months.
The IRS says you must file a tax return for a short tax year. For example, if you start your business on July 1 and your tax year ends December 31, you would need to file your first business tax return for the six months from July 1 through December 31. IRS publication 538 - Accounting Periods and Methods explains how to figure your business taxes for a short year.
Do I Have to Report My Fiscal Year to the IRS?
Other than reporting your accounting year on your Employer ID application, you don't have to report your fiscal year to the IRS. but you must let the IRS know which tax year you are using. The IRS says, "Unless you have a required tax year [sole proprietors, for example], you adopt a tax year by filing your first income tax return using that tax year."