Determining your LLC’s fiscal year means firing up your accounting skills and checking your datebook. Like any other business, it is important to maintain consistent records of your LLC’s yearly revenues and expenses in an annual accounting period. In keeping your books, the IRS recognizes two main types of taxable or tax years—a calendar tax year and a fiscal tax year. Your business structure and cycle will help determine whether a calendar or fiscal tax year is appropriate.
- Calendar tax year. A calendar year is twelve consecutive months, running from January 1st and ending December 31st. Most small businesses use a calendar year as their tax year.
- Fiscal tax year. A fiscal tax year is twelve consecutive months ending on the final day of any month other than December (i.e. July 31st). Alternatively, a fiscal tax year may also be a 52 to 53 week tax year that does not end on the last day of a given month. Under a 52 to 53 week fiscal year, your tax year always concludes on the same day of the week when it lasts occurs in that calendar month (i.e. the last Wednesday in March) or falls nearest to the last day of that month.
The LLC is a creation of state law and its owners are called members. The federal government does not recognize the LLC as a business classification for income tax purposes. An LLC may be taxed as sole proprietor, partnership, or corporation for federal income tax purposes. In some instances, you may elect how your LLC will be classified in an IRS filing. State income tax authorities often follow IRS classifications for LLCs. Check with your accountant or tax professional to determine what classification and tax year makes the most business sense for your LLC.
- Single Member LLC. A single member LLC has only one owner. Like a sole proprietor, a single member LLC normally files individual income tax returns and uses a calendar year. Applying a calendar year approach simply tracks an owner’s individual income tax year.
- LLC as Partnership. An LLC with two or more members may be treated as a partnership. When an LLC is a partnership, its taxable year adheres to its members’ tax years. If its members are currently paying income taxes on a calendar year, then the LLC will likely do the same. If different members have different tax years, IRS guidelines look to other determining factors, such as the tax year of LLC members owning a majority interest or of the LLC’s principal members or which tax year yields the least combined deferral of partner income.
- LLC as Corporation. In some instances, an LLC with one or more members may opt to be classified as either an S corporation or a C corporation. Owners of an S corporation are typically required to use a calendar year, but in certain situations may elect a different tax year with IRS approval. However, a C corporation files separate corporate income taxes from its individual owners’ tax returns and has greater flexibility in choosing between a calendar year and a fiscal year.
Once you have established your LLC’s taxable year, be aware that you must follow it in subsequent years and it can be difficult to change your taxable year in the future. However, you may be able to vary your LLC’s tax year if there is a valid business reason for the modification, such as making an adjustment for a seasonal or cyclical business. But you must formally request and receive IRS approval in advance to change your tax year. The IRS wants to avoid situations in which changing your tax year may result in lost or distorted revenues.
The following IRS tax publications and forms may be useful to you and your tax professional at www.irs.gov:
- General Info on LLC Taxation – Publication 3402, Taxation of Limited Liability Companies
- Calendar and Fiscal Tax Years – Publication 583, Starting a Business and Keeping Records
- Elect LLC Business Classification – Form 8832, Entity Classification Election
- Electing a Different Tax Year – Form 8716, Election To Have a Tax Year Other Than a Required Tax Year
- Request Change to Tax Year – Form 1128, Application to Adopt, Change, or Retain a Tax Year