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Calendar or Fiscal? Which Tax Year is Right for your Small Business?

by Caron_Beesley, Community Moderator

  • Created: January 7, 2013, 7:51 am
  • Updated: January 7, 2013, 7:51 am
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8 comments

Did you start a business last year? No? Are you planning to start one this year? Did you know you can choose the tax year you intend to operate under?  Choose well, because there are pros and cons for either method. 

A tax year is an accounting period for which you must report your taxable income and business expenses, and the law requires you to operate according to a consistent tax year. The most common is the most obvious: the calendar year. However, businesses can also report based on a fiscal tax year and a short tax year.

Here are some tips for choosing the right period for your small business.

1. Calendar Tax Year

This is a simple and intuitive method adopted by many small business owners, requiring you to track and report income and expenses to the IRS much like individual tax payers do: on an annual basis from January 1 to December 31.

Whether you should use this method is typically determined by how your business is legally structured. For example, if you are a sole proprietor, there is no separation of your business and personal taxes, so a calendar year method is typically required. Likewise, business partnerships or limited liability companies (LLCs) also will generally use the same tax year most business owner(s). S corporations and personal service corporations will also use a calendar year in most cases.

  • Generally, anyone can adopt the calendar year. However, if any of the following apply, the IRS requires you to adopt the calendar year:
  • You keep no books or records
  • You have no annual accounting period
  • Your present tax year does not qualify as a fiscal year
  • You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations

Read more about the tax implications of your business structure.

2. Fiscal Tax Year

Many corporations and larger firms operate on a fiscal tax year basis – a period of 12 consecutive months ending on the last day of any month that isn’t December. For small businesses that might not have the accounting expertise on-hand to keep everything reconciled, a calendar tax year is easier to manage. But there are exceptions where it may make sense to consider a fiscal year. For example, if you operate a seasonal business, reporting income by calendar year could split your season and give a distorted view of income and expenses.

Likewise, if your business shows most of its expenses in one year and income in another, it may be worth looking into a fiscal tax year so that both periods are included in the same 12-month set.

3. Short Tax Year

Technically, a short tax year (less than 12 months) is not an annual accounting period; instead, it applies to businesses that didn’t exist for the entire tax year or those that changed their tax year period during the year.

If you started your business any time during the tax year, you still need to file a tax return for the time you were in existence. Requirements for filing the return and calculating tax owed are generally the same as the requirements for a return for a full tax year (12 months) ending on the last day of the short tax year.

Can You Change a Tax Year?

Once you’ve adopted a tax year, you may need to get IRS approval to change it. Typically, businesses that change their legal structure may wish to shift from a calendar year to a fiscal year method. In these cases, you will need to file Form 1128, Application to Adopt, Change, or Retain a Tax Year.

Read more from the IRS about Tax Years.

Additional Resources

About the Author

Caron_Beesley's Profile Picture
Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley
Tags: Community Blogs, Small Business Cents, Managing, Starting, Taxes

Comments

Phil Gibson | Window Shopper | 3/18/2013 - 12:51 am

Thanks for making an insightful comparison of the various taxation periods. A
good article.

Like ourselves, I've found most enterprises tend to use a fiscal year simply
because that's the more traditional approach. It's also how many overseas
businesses (such as those in Australia, the UK and New Zealand) prefer to
operate although a growing number are deciding to opt for calendar year as an
alternative.
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LisaL | Window Shopper | 1/11/2013 - 12:28 pm

Good article, thanks.

Your point about seasonality of the business is important, especially if the
company has its busy time at the end of the calendar year for the holiday
season.

Another reason for choosing a fiscal year is to match to the customers in
your industry so your sales cycle matches with their budget year. For
example, if the business sells to colleges it would make sense to have June
30th be the ending date since most schools are on that same schedule.
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Dexposahin | Window Shopper | 1/10/2013 - 9:08 am

You have made some excellent points there. Used to do they’re certified inside subject and barely found any specific info other websites, but great in order to be here, seriously, thanks.   This post was edited to remove a link. Please review our Community Best Practices for more information about how best to participate in our online discussions. Thank you.
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antojames | Window Shopper | 1/10/2013 - 7:13 am

this is one of the best article i have ever seen.but need some good idea
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Julie Robert | Window Shopper | 1/11/2013 - 6:37 am

This is a very helpful article for new business owner, who is going to adopt
a tax year by filing his first income tax return under the tax year of its
choice. This will guide him to choose best tax year according to need of his
business.
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BridgetH | Window Shopper | 1/9/2013 - 8:50 am

I say if you can afford an accountant get one. Be sure to have a good and
honest accountant that will explain things to you.
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BMT | Window Shopper | 1/9/2013 - 8:42 am

Not sure why any business would have a tax year other then the calendar year.
The government does it and it is always a mess. Your example about a seasonal
business only makes since in the first year (partical year). But, after that,
the business's revenues would be annualized regardless of when their tax year
ends.
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Calgary Marketing Company | Window Shopper | 1/7/2013 - 6:48 pm

Great article Caron,
as a Calgary Marketing Company I guide my clients for BusinessTraining on
this and you have some great points.

While I don't think tactically it really matters whether you have a fiscal
tax year or a calendar tax year. It still 12 months. It all depends, though
on when you start your business.
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