March 24 2016
Amid all the excitement of starting a new business, it's understandable that choosing your company's fiscal year may fall off the radar. Yet it's important to give some thought to choosing your company's fiscal year because it affects not only your small business taxes, but also your accounting strategy. And because it's difficult to change your fiscal year once you've chosen, you'll want to choose wisely.
Why you might not need to choose:
Depending on your entity, the IRS will require you to use a calendar year. If your business is a sole proprietorship, partnership, LLC, or S corporation, you'll be using a calendar year. However, the IRS will sometimes make exceptions if an LLC or an S corp can provide a justifiable reason for different year. The majority of businesses that use a fiscal year are C corps.
The IRS requires you to choose a January 1 to December 31 year if:
- you don't have bookkeeping records
- you don't have an annual accounting period
- your present tax year doesn't qualify as a fiscal year, or
- you are following a code of tax regulation that requires it
Most businesses choose a calendar year for one reason: it's simpler, especially if you don't have the expertise or the team to keep track of adjusted deadlines.
Why you would choose a fiscal year:
If your business has a specific non-calendar business cycle, you'll want to choose a fiscal year. For example, if you own a ski resort, the bulk of your income comes in at the beginning of the calendar year, yet your expenses for that season are incurred in November and December. Choosing a fiscal year that encompasses both the expenses and the income will make the most sound financial sense.
To keep it simple, it's best practice to make your end of fiscal year match the end of a typical business quarter, i.e. March 31.
If you decide to change your fiscal year down the road, you'll need to file Form 1128 with the IRS. We recommend you consult with your accountant to strategize the best path for your business.
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