Fiscal: relating to government revenue, especially taxes.Oxford Dictionary
Did you know that you can set the tax year for your business? Yup that’s right. If you want to begin your tax year in April and end it the following March you can do that. Begin in September and end in August? You could do that too. You can set your tax year to end within any month in fact, but the question remains – why?
What Does it Mean to Have a Tax Year?
A tax year is any consecutive 12 months ending on the last day of the month OR any consecutive 52-53 week year that does not have to end on the last day of the month (see this IRS page) that your business uses to denote as a tax year. If you are an S-Corp your federal tax forms would need to be filed by the 15 day of the 3rd month following the end of your fiscal year. Most businesses are on a calendar year (ending December 31) so your S-Corp filings would be due on March 15. If your fiscal year ends on June 30 your tax filings would be due on September 15.
Why Should You Choose a Non-Calendar Tax Year?
Let’s take a look at the US federal government first since they don’t use a calendar year. Originally when the government was formed they were on a calendar year, but it changed to July 1 – June 30 in 1842. Why? Well I couldn’t find a definitive answer, but the speculation is that if they were on a calendar year and a newly elected congress takes office in January that means that the newly elected congress has to operate under a budget passed by the previous congress for the entire year. That didn’t sit well and so the fiscal year was changed to begin on July 1, giving the new congress 6 months to form and pass a budget instead of forcing them to live with an older budget for the whole year.
As of 1974 the federal government now begins its fiscal year on October 1 of each year and ends on September 30 of the next year. This was signed into law in the Congressional Budget and Impoundment Control Act of 1974, ostensibly to give congress more time to finish the budget as stated in this Wikipedia article. Of course you might note that changing it to October 1 is now 9 months to pass a budget – nearly a year – so it’s not much better now than it was prior to 1842… That’s government for you.
Anyway I think we can see that the original change to July 1 made sense even if it complicated things a bit. Most of the state governments, like California, have fiscal years that begin on July 1 too. You are most likely NOT a state government however, so why would you want to use a fiscal year that wasn’t a calendar year?
The most common reason to use a non-calendar tax year is to align the year with your typical business revenue cycle. Retail industries are a good example of this. Most retail stores generate their biggest sales numbers during the Christmas holiday season and into January so many have selected a fiscal year that ends at the end of January. Nordstrom is a good example of this with 52-53 weeks per year in their fiscal year, ending on January 29, 2022 for their current year.
Ending a fiscal year after the big sales numbers allows a company to create a budget for the next 12 months based on assets currently held at the high point and with past performance in mind. If they used a calendar year these big sales numbers for a single season would most likely be split between two fiscal years and that can complicate business planning. Reports on inventory control, supply chain spending and even seasonal employee hiring would be split between fiscal years and make it difficult to plan for the real season the following year.
Other types of businesses may choose to end their fiscal year on June 30 to align with their local state government. These might include private schools who want the same school year as the public schools, or companies that work closely with one or more state agencies. If you run a farm you may align your fiscal year with the growing and harvesting season for your crops.
When Should YOU End Your Tax Year?
That said, at last search the calendar year is used as the fiscal year by about 70% of publicly-traded companies in the United States. I would bet that number is higher still for privately owned companies and small businesses in particular. All of my companies have run on a calendar year and I find it far less complicated if you don’t have to align with a specific season. All of the tax documentation is written for a calendar year so you have a cognitive advantage there as well.
Since personal taxes are on a calendar year and 70% of companies are also on a calendar year when do you think the busiest time for accountants is? Business taxes would mostly be due March 15 or April 15. Personal taxes are due April 15. It’s a solid guess that many accounting firms end their fiscal year at the end of April or May.
Unless you are an accountant or fit into one of those categories above, my recommendation is that if you don’t have a solid reason not to use a calendar year as your fiscal year, then use a calendar year. Especially as a small business you are going to want to keep things as simple as possible when it comes to taxes and aligning your fiscal year with your personal taxes is far easier to remember.
When all of your due dates and business quarters line up with the calendar you don’t have to do any calculations (albeit simple) to remember when to complete your paperwork and trust me, every little bit helps when starting a business.
How Do You Choose a Fiscal Year?
The simplest way to choose a fiscal year is to file your taxes according to your choice after your first year of business. Let’s say for example that you want to use a calendar year and you started your business in October. Come March 15 or April 15 of the following year you’d file your taxes as if your business was open the entire previous year.
If you want to end your fiscal year at the end of October then you would file your business taxes 3-4 months later by January 15 (for S-corps) or February 15 (for C-corps) after the first October 31 you’re in business. From then on your taxes would be due the same time every year.
If you chose poorly and want to adjust your fiscal year to something else you can file a Form 1128 with the IRS. It’s bound to be updated so I won’t link to it, but it’s simple to find on the irs.gov website.
Note that there are a few cases of companies who must file on the calendar year and those exceptions can be found on the same page I referenced above.
In general, I say to set yourself up for success and end your fiscal year on December 31. Then go celebrate the New Year.