Choosing Between a Calendar and Fiscal Tax Year

Many business owners agonize over corporate entity selection, brand identity, and marketing strategy, then check the box for “calendar year” on a tax form without a second thought. Yet, this single decision dictates how they report income, manage cash flow, and interact with the IRS for the duration of the business.

Choosing between a calendar tax year and a fiscal tax year should not be an afterthought. Aligning your reporting obligations with your business cycle is a powerful strategy that creates opportunities to maximize tax advantages. The decision is more nuanced than many people realize, and, once you make the election, changing it requires IRS approval, which carries its own complications.

Understanding Calendar Tax Year vs. Fiscal Tax Year

Choosing between a calendar year and a fiscal year dictates how a business reports income and expenses, and pays taxes. Choosing the right structure can affect tax filings, financial planning, business forecasting, and overall business strategy.

What Is a Calendar Tax Year and Who Is It Best For?

A calendar tax year covers the 12-month period from January 1 to December 31. Businesses that select a calendar year file their taxes in the first quarter, by March 15 for partnerships, LLCs, and S-corps, and by April 15 for C-corps.

Sole proprietorships, small businesses with consistent revenue, and businesses without significant seasonal income fluctuations commonly use a calendar tax year.

What Is a Fiscal Tax Year and Who Will Benefit From It?

A fiscal year consists of 12 consecutive months, but the year does not necessarily begin on January 1. Instead, a business can select its fiscal year start date. The fiscal year does not necessarily need to start on the first of the month, and could instead be the same day every year, such as the first Monday in July.

Flow-through entities, like partnerships, LLCs, and S-corps, that use a fiscal year must file their tax returns by the 15th day of the third month following the close of their fiscal year. For example, if the fiscal year ends on June 30, taxes are due on September 15.

Retail businesses and those with significant seasonal fluctuations can benefit from a fiscal tax year. The fiscal tax year can better align with business cycles to provide clearer information about profit and loss and more accurate income forecasting.

Choosing Between a Calendar Year and a Fiscal Year

While following a calendar year may be easier for some businesses, others may find that a fiscal tax year presents a more accurate picture of company performance. For example, a snowplowing company that does most of its work between November and March might benefit from a fiscal tax year. Splitting revenue between December and January would make it more difficult to obtain an accurate picture of the company’s performance over a single season.

Selecting your company’s tax reporting period is a strategic decision. Once a company adopts a tax year, that same period must be used for all bookkeeping, income reporting, and expense tracking. When evaluating whether a calendar or fiscal tax year is the best fit, looking at industry standards can be advantageous. Adopting the same fiscal cycle as your competitors allows for a more accurate comparison of financial performance within your specific market.

Some Businesses Cannot Choose a Tax Year

Although many businesses can choose between a calendar year and a fiscal tax year, the IRS requires that some businesses adopt a calendar year. Companies that do not keep books and have no annual accounting period are required to adopt a calendar tax year. Likewise, the IRS treats sole proprietorships as indistinguishable from the owner, and individuals are generally required to file their taxes on a calendar year basis.

How to Adopt a Fiscal Tax Year

A company should adopt the reporting structure that works best for the business. A business adopts its tax year by filing its first income tax return using the selected timeframe. However, the IRS does not consider a company to have chosen a fiscal or calendar year by simply requesting an Employer Identification Number (EIN), paying estimated taxes for its first year in business, or requesting an extension to file business income taxes.

Can You Change Your Business’s Tax Year?

Companies that change their legal structure or operations may benefit from changing their tax year. To do so, they must obtain permission from the IRS and file Form 1128, “Application to Adopt, Change, or Retain a Tax Year.” This may create a “short tax year” that is less than 12 months. In this case, the company’s taxes will be based on annualized income and expenses. However, the company may be able to use a relief procedure described in Section 443(b)(2) of the Internal Revenue Code to reduce its tax burden.

Gudorf Tax Group Offers Comprehensive Tax Planning Strategies

Selecting a tax year is a strategic decision that benefits from professional guidance. Gudorf Tax Group offers comprehensive tax strategies to help businesses navigate the complex tax and legal landscape. Our tax professionals will help ensure your business is established on a strong legal and financial foundation and well positioned for growth.

Contact Gudorf Tax Group Today

Contact Gudorf Tax Group today to schedule an appointment with our Ohio accounting and tax preparation professionals.