Business name. Location. Equipment. Logo. Hiring choices. When you launch a small business, you are inundated with decisions and choices to make. One of them you may need to know more about is choosing the tax year for your business.
The Internal Revenue Service requires you to operate your business according to a consistent accounting period. You must report your taxable income and business expenses for the period, or tax year. You can operate your business under the calendar year just as you do with your personal taxes or you can choose another start and end date for your business, called a fiscal year.
To help you decide which method is right for your business, let’s look at both of them.
Calendar Tax Year
With this method, you will track and report income and expenses on an annual basis for the 12 consecutive months from January 1 to December 31.
In general, any small business can adopt a calendar year, and most do. However, the IRS requires you to file with a calendar year if you any of the following statements are true about your business:
- You do not keep books or records
- You do not have an annual accounting period
- Your present tax year does not qualify as a fiscal year
- You are required to use calendar year by the IRS Code or its Income Tax Regulations
Fiscal Tax Year
A fiscal year is a period of 12 consecutive months that ends on the last day of a month other than the month of December. For small businesses, it makes sense to operate this way. Seasonal businesses are one example. If you are busiest during the holiday season, your business might show expenses in one year and profits in another year.
Reporting your income by calendar year could give a confusing view of your profit and loss. By establishing a fiscal tax year reporting system, you can show both sets of figures in the same 12 months.
If your company has subscribers or members, a fiscal year set-up lets you put those service costs and revenues in the same 12-month period. If your business is centered on a large annual event, such as a trade show or a conference, a fiscal year that ends shortly after that event can help you plan the next year’s budget with important information.
Your business tax year is established when you file your first tax return using that tax year. If you file your business tax return as part of your personal tax return, you will be establishing a calendar year for your business.
If qualify for a fiscal year, you can indicate on your business tax return the start and end dates of your 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.
For example, if your company’s fiscal year starts on March 1 and ends on Feb. 28, your tax deadline is June 15.
If the legal structure of your business changes from a sole proprietorship to a partnership or a corporation, you may want to change from a calendar year to a fiscal year.
You will need to prove to the IRS that you have a legitimate business reason for changing your tax year. You can apply for approval by filing the IRS Form 1128. You may wish to use a tax professional to assist you in filing of this form, as it is a time-consuming process.