Choosing a Fiscal Year for Your Business

All businesses are required to pay taxes and keep accounting records year by year. You automatically choose your tax year when you file your first tax return for your business. After that, you have to get the IRS's permission to change the year.

What Is a Fiscal Year?

You should first be aware that the IRS (and businesses) recognize three kinds of years:

• Tax year: A business's tax year is 12 months used for financial accounting, budgeting, and reporting. Your business's tax return deadline typically corresponds with the last day of its tax year.
• Calendar year: A calendar year is, as it suggests, a 12-month period beginning on January 1 and ending on December 31. The vast majority of small businesses use the calendar year as their tax year. However, your tax year doesn't necessarily have to end on December 31.
• Fiscal year (FY): When a business's tax year ends on the last day of any month other than December, it's said to have a "fiscal year." In other words, if your business's tax year isn't the same as the calendar year, then your company's tax year is considered a "fiscal year."

In other words, all businesses must choose a tax year. Your tax year can either be the calendar year or a fiscal year of your choosing.

Sometimes, these above-defined terms are combined or interchanged. Typically, when someone asks what your company's fiscal year is, they mean your tax year.

For example, your state's revenue department might refer to a business's tax year generally as a fiscal year. Specifically, you might see on your state's revenue department website that your business's tax return is due on the 15th day of the fourth month of your business's fiscal year. In this case, if your business runs on a calendar year, then its fiscal year is simply the calendar year and your return would be due on April 15.

Some examples of common fiscal years include:

• January 1 to December 31
• April 1 to March 31
• July 1 to June 30, and
• October 1 to September 30.

Businesses, governments, and other organizations choose a fiscal year and center their budgeting and financial statements around their chosen year. So, when you plan out your budget and assess the financial health of your business, you'll use your fiscal year.

For example, suppose your fiscal year is from July 1 to June 30. Now, suppose you want to increase your profits by 5% this next fiscal year. You'll want to track your revenue and budget your expenses so that by June 30, you've met your goal. If you're not quite at your goal by March, you might consider cutting costs to achieve that 5% bump.

Choosing a Tax Year For Your Business: Fiscal Year vs. Calendar Year

When you start a business, one of your first tasks is selecting your company's fiscal year. This choice could be simple and obvious (and sometimes a specific fiscal year is even required). Alternatively, you could need to put some more thought into the decision and consult a financial advisor or lawyer. While changing your tax year later isn't necessarily impossible, it can be complex, expensive, and time-consuming (as explained later).

Factors to Consider When Picking a Tax Year

When choosing a tax year for your business, you should consider:

• The tax years for other businesses in your industry. You could quickly get your answer by looking at what other businesses in your industry are doing. For example, many universities choose a fiscal year that ends on June 30 or August 31 so their fiscal years correspond with the school year. So if your business is broadly in the education industry, it might also make sense to line your fiscal year up with the school year.
• The tax years for the kinds of businesses and organizations you'll regularly be working with. If most of your contracts will come from a specific business or organization or will be connected to a specific industry, look at the associated fiscal years for those businesses or organizations. For instance, if your business is a federal government contractor, you might want to adopt the same fiscal year as the U.S. government: October 1 to September 30.
• Which times of the year you'll see the most and least profits. If your business is seasonal or you have reasonable expectations for when you'll see a rise and fall in profits, you could choose a fiscal year that begins with or ends during high-profit times. Aligning your fiscal year with your profits can help you better predict future profits and manage expenses.
• The economic cycle of your area. If your business depends on in-person interactions, consider the customer traffic that your geographic area generally experiences. For instance, if you run a hotel in a coastal city in upper New England, your town might not have much tourism during the winter months, leading many business owners to seasonally close. If your downtown turns into a virtual ghost town during some months, you can plan your accounting period around this cycle.
• IRS requirements. Your type of business might be required to adopt a calendar year as its tax year. Unless your business has special considerations that prompt a change, you might be better off sticking with your required tax year.

Oftentimes, you'll want to choose a tax year that's optimal for accounting and bookkeeping. You might want to choose a tax year that ends during a time when you can easily wrap up year-end numbers and accounts. For example, choosing a fiscal year that starts when you have your biggest business boom can be advantageous. These high profits can help you plan out the rest of your year and can give you time to organize and file your taxes during your business's slower months.

On the other hand, picking a fiscal year that ends right after your business boom (for example, at the end of January after collecting holiday sales) also has its benefits. Choosing this fiscal year-end can leave the company enough money to pay taxes and settle its year-end accounts.

Calendar Year: More Common For Sole Proprietorships, Partnerships, and LLCs

Many sole proprietors, partnerships, limited liability companies (LLCs), S corporations, and other pass-through tax entities use the calendar year as their tax year. The calendar year is a popular choice for two main reasons:

1. Many sole proprietors, partnerships, LLCs, and S corporations are required to use the calendar year as their tax year unless they receive special permission from the IRS (as explained later).
2. Owners of pass-through entities report their business income and loss on their personal returns, and their personal returns run on a calendar year.

Typically, going off the calendar year is sufficient for small business owners. However, you might want to opt for a fiscal year other than the calendar year if your business is seasonal or you experience significant peaks throughout consistent points in the year.

For example, suppose you sell rolled ice at a downtown location and your business is open all year. While your business isn't necessarily seasonal, it likely experiences an uptick in customers in the summer months. In this case, you might want to choose a fiscal year that corresponds with these predictable profit-heavy months.

See our article on choosing your LLC's fiscal year for details specific to single-member LLCs, LLCs taxed as partnerships, and LLCs taxed as corporations.

Fiscal Year: More Common For Corporations

Larger businesses organized as regular C corporations (often referred to as just "corporations") have more leeway in choosing their tax year than most others. They often choose to use a fiscal year instead of the calendar year as their tax year. For example, the fiscal year for many C corporations ends in March, June, or September. Such corporations typically choose to use fiscal years for accounting convenience.

Because corporations have fewer restrictions and requirements than other entity types, it's usually best to choose a fiscal year that best corresponds with your natural business year. Go through the factors above to analyze the best tax year for your corporation.

When Do Fiscal Years End?

A fiscal year ends on the day before the fiscal year begins. This date is called a "fiscal year-end." For example:

• If your fiscal year begins on January 1, its fiscal year-end is December 31 of that same year.
• If your fiscal year begins on April 1, its fiscal year-end is March 31 of the following year.
• If your fiscal year begins on July 1, its fiscal year-end is June 30 of the following year.
• If your fiscal year begins on October 1, its fiscal year-end is September 30 of the following year.

Some businesses warrant a slightly more complicated answer. A business can sometimes choose to end its fiscal year on a specific day of the week rather than on a specific calendar date. These businesses are known as having 52-53-week taxable years because the length of the tax year fluctuates.

For example, suppose a business elects to have its fiscal year-end fall on the last Saturday of June. This date will change every year. It might sometimes fall on June 30 (the actual last day of June) or on any of the six days preceding June 30.

Alternatively, a business can elect to have its fiscal year end on a specific day of the week closest to the last day of a particular month. For example, suppose now a business elects to have its fiscal yearend fall on the Saturday closest to the last day of June. Again, this date will change every year and could sometimes land on June 30. But instead of falling on any of the six calendar days prior to June 30, the fiscal year-end could fall in early July. For instance, if June 30 falls on a Thursday, then the closest Saturday to June 30 would be July 2.

You can choose whichever day of the week makes the most sense for your business and industry. However, oftentimes, it makes sense to choose a day near the end of the week.

IRS Tax Year Requirements for Businesses

The IRS requires some businesses to use the calendar year as their tax year. You must use a calendar year if any of the following are true:

• you don't keep books or records
• you don't have an annual accounting period
• your current tax year doesn't qualify as a fiscal year; or
• a provision of the Internal Revenue Code (IRC) or a federal tax regulation requires you to use a calendar year.

Ordinarily, the IRS requires sole proprietors, partnerships, limited liability companies (LLCs), S corporations, and personal service corporations (a special tax entity) to use the calendar year as their tax year.

Sole proprietors, partners, LLC members, and S corporation shareholders are all owners of pass-through tax entities. As mentioned earlier, owners of pass-through entities report and pay income and loss from their business on their personal tax returns. Because these owners pay business income taxes on their personal returns, it makes sense that these business types would automatically use a calendar year as their tax year.

If your business is required to use the calendar year as its tax year but you want to switch to a fiscal year, you can potentially change your tax year.

How To Change Your Tax Year to a Fiscal Year

Sometimes, businesses want to change their tax year from a calendar year to a fiscal year. Perhaps your business was required to use the calendar year. Or, maybe, you chose one tax year for your business (calendar or fiscal) but circumstances changed that made it more reasonable to switch to a different tax year. If you want to change your tax year, you'll likely need to request permission from the IRS to do so.

To get permission to change your tax year, most business types must usually file IRS Form 1128, Application to Adopt, Change, or Retain a Tax Year. By using Form 1128, you might qualify for automatic approval or you could need to request a ruling. If you qualify for automatic approval, you don't need to pay a fee. However, if you need to request a ruling, then you must pay a hefty user fee.

Business Purpose for Changing Tax Year: 25% Gross Receipts Test

The IRS will generally allow a partnership, LLC taxed as a partnership, or S corporation to change its tax year if there's a sufficient business purpose for making the change. Specifically, a "sufficient business purpose" can be when your business's requested accounting period corresponds with either your business's:

• required tax year (the calendar year)
• ownership taxable year (taxable year of a shareholder holding more than 50% of the company stock), or
• natural business year.

Under this request, businesses typically argue that their requested fiscal year aligns with their company's natural business year. So what is a natural business year?

The IRS uses the 25% gross receipts test to determine a company's natural business year. Under this test, the gross receipts from the last two months of the most recent 12-month period must account for 25% or more of your business's total gross receipts. The same must be true for the two preceding 12-month periods as well.

For example, suppose you're requesting a tax year ending on June 30. In that case, you must calculate the total gross receipts between July 1 and June 30 of the most recent year. You'll also need to calculate the gross receipts for May and June of that year. Repeat these two calculations for the previous 12-month periods. The gross receipts for May and June must account for at least 25% of the total gross receipts for that same 12-month period. This must be true for all three 12-month periods.

Other Reasons for Changing Your Tax Year

You can qualify to change your tax year for other reasons besides the gross receipts test, such as a change in ownership. Because most corporations don't have a required tax year and thus don't usually need to qualify for an exception, they generally have more leeway to change their tax years.

The reasons and ways to change your tax year will largely depend on what kind of business you have. If you're considering changing your tax year, you should speak with a tax professional. A professional can let you know whether changing your tax year makes sense. A tax professional, like a CPA or attorney, can also help you navigate complicated federal tax laws and identify the best method to request the tax year change for your business.

Additional Help With Picking Your Business's Fiscal Year

You should consider consulting a tax attorney or accountant before locking in your company's fiscal year. Tax laws can be very complicated and a tax professional can quickly tell you what you can and can't do along with the best way to accomplish your business goals.

If you want to look at the topic on your own, read the IRS's webpage on tax years. The webpage gives a general overview of calendar years versus tax years and includes links to IRS forms and publications. You can also find useful IRS resources on the IRS Form 1128 webpage. See the Instructions for Form 1128 Instructions for details on the relevant laws, how to complete the form, and when and where to file.