Calendar Tax Year or Fiscal Tax Year? Which is Right for You

Many business owners use a calendar year as their company’s tax year. It’s intuitive and aligns with most owners’ personal returns, making it about as simple as anything involving taxes can be. But for some businesses, choosing a fiscal tax year can make more sense.

What’s a fiscal tax year?

A fiscal tax year consists of 12 consecutive months that don’t begin on January 1 or end on December 31 — for example, July 1 through June 30 of the following year. The year doesn’t necessarily need to end on the last day of a month. It might end on the same day each year, such as the last Friday in March.

Flow-through entities (partnerships, S corporations and, typically, limited liability companies) using a fiscal tax year must file their return by the 15th day of the third month following the close of their fiscal year. In addition, those entities are generally restricted to using a calendar year unless they make election when they are first formed or apply for a change the accounting period to a permitted year. Making the election for a fiscal year is much easier when the flow through entity is first formed.

When a fiscal year flow-through entity (partnerships, S corporations and multiple owner LLCs) is first formed, it can elect the fiscal yearend of September, October or November besides the normally required calendar yearend.

Newly formed S corporations or C corporations making an S corporation election can make the fiscal year election by properly completing Form 2553 Election by a Small Business Corporation requesting the eligible fiscal yearend. In addition, all flow through entities must timely file Form 8716 Election to Have a Tax Year Other Than a Required Year.

When a Fiscal Year Makes Sense

By having a fiscal year, your flow through entity tax returns are due earlier than the same type entity using a calendar year. For example, an S corporation with a fiscal year end date of September 30 would have a December 15 tax due date. So, an individual using a calendar year for their individual return could know the exact amount of income that would be flowing to the owners of that S corporation. That makes for great tax planning. Imagine being able to project your personal taxes that will be due April 15 four months beforehand.

Flow through entities making the fiscal year election have tax deposit requirements that mitigates the benefits of income deferral.

A key factor to consider is that if you adopt a fiscal tax year you must use the same time period in maintaining your books and reporting income and expenses. For many seasonal businesses, a fiscal year can present a more accurate picture of the company’s performance.

In addition, if many businesses within your industry use a fiscal year end and you want to compare your performance to your peers, you’ll probably achieve a more accurate comparison if you’re using the same fiscal year.

Before deciding to change your fiscal year, be aware that the IRS requires businesses that don’t keep books and have no annual accounting period, as well as most sole proprietorships, to use a calendar year.

There Can Be a Difference

Although choosing or changing a tax year may seem like a minor administrative matter, it can have an impact on how and when a company pays taxes. We can help you determine whether a calendar or fiscal year makes more sense for your business.

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