You can report your business’s income and expenses based on the traditional calendar year. But for some businesses, reporting with a fiscal tax year is more efficient. A fiscal year calendar is a customized 12-month period for taxing and accounting purposes.
A fiscal year calendar cannot start on January 1 or end on December 31 like a calendar year. You can start a fiscal year for a business on the first day of any month besides January. A fiscal year must be 12 months long and always ends on the same day of the week. A fiscal year calendar could have its start of the financial year fall on July 1, and the end of its financial year fall on June 30.
Due to seasonal sales volumes, some industries benefit from a fiscal accounting year. Fiscal years allow you to reduce your tax burden by spreading income and expenses over the same sales cycle. If you experience high and low sale months, a fiscal year helps you see a more accurate picture of progress.
Who can use a fiscal year?
Some business structures are more likely to use a fiscal accounting year than others. The IRS does not allow some structures to use a fiscal year calendar without its permission.
Sole proprietorships, partnerships, and LLCs must use the same schedule for personal and business taxes. Because you file personal taxes with a calendar year, these business structures often use a calendar year for recordkeeping and business taxes.
As a sole proprietorship, partnership, or LLC, you must get the IRS’s consent to use a fiscal year. You need to show that there is a business reason for you to use a fiscal year. If you are approved, you file your business tax return on the 15th day of the fourth month after the end of your tax year. For example, if your fiscal year began in February, you would file in May.
Corporations can choose to use a fiscal or calendar year. You decide which tax year is right for your small business with your tax return. Attach a statement to your return that includes the month and date your new tax year will end next year. Since a fiscal year must end on the same day of the week every year, also include the day of the week the tax year will always end on in your statement.
As a corporation using a fiscal year, file your tax return on the 15th day of the third month after the end of your tax year.
Once you send the first tax return, it is difficult to change your tax year. You must send a request to the IRS explaining your business reason to switch your tax year.
Fiscal year calendar for accounting
Businesses use fiscal years to organize their records in a way that relates to the ups and downs of sales. For some businesses (e.g., seasonal businesses), doing accounting for small business for a fiscal year gives you a clearer picture of growth.
Let’s say you run a seasonal business and sales peak in November. If you were using a calendar year, your last quarter would show high income. But you don’t pay the expenses for your busy season until January. The calendar tax year splits the income and expenses between two different tax returns.
But, a fiscal year would help you keep the high and low expenses and income together. If you started your fiscal year in February, you keep the income and expenses together. That gives a more accurate picture of your progress on the tax return.
How do you manage your fiscal year records? Try Patriot’s accounting software for small business for accurate and affordable recordkeeping throughout your tax year. Try it today with our free setup and support.
This article was updated from its original publication date (11/18/2014).