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How To Establish Your New Business’ Tax Year

You may be able to elect a tax year that suits your business; how will you choose?

The IRS requires your business to determine your taxable income based on your tax year and file a return accordingly. Your tax year is the yearly accounting timeframe for reporting income, reporting expenses and maintaining records.

There are 2 main choices for eligible tax years: Calendar Year and Fiscal Year. A calendar year is the same timeframe for individual taxpayers—January 1st through December 31st. A fiscal year is twelve straight months that ends on the last day of any month with the exception of December. Your fiscal year can also be a 52-53 Week Tax Year and that does not have to land on the last day of the month but it does need to cover 12 straight months and it does have to end on the same day of the week every year.

Why choose a Fiscal Year over a Calendar Year?

A fiscal year can be advantageous to some businesses. For example, many retailers’ fiscal year lasts 52 weeks (or 53 depending on the year) and starts on the first Monday closest to the first day of February and ends on the last Sunday that is closest to the end of January. This allows the retailer to start the year stronger than if they started at the beginning of January due to the post-Holiday low volume in sales—it’s the slowest month for retail. So instead of the first quarter looking fiscally weak, January gets lumped in with Q4’s Holiday peak sales which looks more attractive and it also helps the company spread the quarterly budget out over January.

Another example is the travel and tourism industry whose fiscal year is typically from July 1st to June 30th. This allows travel and tourism companies to start their year with their highest volume but also absorb the steep dropoff that happens in September.

Some business have required tax years set by the IRS

Partnerships, S-Corps and Personal Service Corporations are usually required to follow a tax year determined by the IRS. However, an organization can request approval for using another tax year and once approved, makes the election under section 444 of the Internal Revenue Code.

Can you choose between a Calendar Year and a Fiscal Year?

In most cases, anyone can choose the Calendar Year. But, some organizations are required to choose a Calendar Year if they meet any of the following criteria:

  • You do not keep any books or records
  • You’ve not established a yearly accounting method
  • Your current tax year doesn’t qualify as a fiscal year
  • The Internal Revenue Code has required you to use the Calendar Year

Fiscal Year vs. 52-53 Week Year

If the IRS allows you to elect a Fiscal Year, you can elect the month your fiscal year begins and the 12th month after it that your year would end. So if you chose May as the month you want it to start, your fiscal year would be from May 1st through April 30th of the following year. Again, you must keep your books and records during this period and report your income and expenses for the pre-defined period.

Should you elect a 52-53 Week Fiscal Year, you can choose the either a certain day of the week that falls within the month or a certain day that is closest to the end of the month. For example, you can choose to end your year on the last Thursday of a month or, you can end it on whatever Thursday is closest to the end of the month, which in some years, the actual date may be in the next month. So let’s say the month ends on Wednesday the 31st but the Thursday closest to the end of the month is the on the 1st of the following month.

To choose a 52-53 Week Year as your tax year, you must adhere a statement to your return and include:

  • The month the tax year ends
  • The day of the week the tax year ends
  • The date the tax years ends and whether it’s a day that occurs last in the month or a day that is closest to the end of the month.

If you choose a 52-53 Week Tax Year, you should begin your tax year on the earliest date of the calendar month that is nearest to the first day of the first month in your 52-53-Week Tax Year.

What if the business didn’t exist for a whole year or you want to change your fiscal year?

A Short Tax Year can be filed if the business was not in existence for part of a 12 month period. Also, if you’ve changed your tax year with the IRS and State, there may be a return that you need to do based on a Short Tax Year to make up the difference.

So if your business entity did not come into existence until May and you’ve chosen February 1st through January 31st to be your Tax Year, then your tax year will be a Short Tax Year—May 1st to January 31st (January 31st of the following calendar year). Since keeping records and books is required for electing a Fiscal Tax Year, by filing under a Short Tax Year, you’ll only need to be able to provide proof of consistent bookkeeping from May 1st to January 31st.

If you changed your tax year or were required to change your tax year, your new tax year begins the very next day after your former tax year ends. To change your tax year, you must "file form 1128".

Generally, a Short Tax Year is annualized (spread out over a year) but, self-employment tax is based on the income that coincides with the actual period of the Short Tax Year.

Do you have the support you need to manage your small business bookkeeping? Contact us to schedule an appointment to speak with a local small business advisor.

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