It's likely a question that falls through the cracks when you're caught up in the hustle of starting a business, but certainly one worth asking: Should my business report on a calendar year or on a fiscal year?
Most U.S. businesses report their taxable income on a calendar year. But in some instances, they might find it preferable to report on a fiscal year, a 12-month period that ends sometime other than December 31.
For example, if your business has a specific, non-calendar business cycle, you might want to consider such a move. Businesses that are highly seasonal—such as a restaurant in a summer resort area—would likely benefit from reporting their financials on a fiscal year. Doing so would provide a better measure of how a business performs over its natural business cycle.
The same is true of a business that typically generates sales and corresponding expenses in two different calendar years. 'If the business has a natural ending and there's a particular way to how the business flows, it might want to adopt a fiscal year,' says Barbara Weltman, a tax and business attorney and author of J.K. Lasser's Small Business Taxes (Wiley 2009).
You should know that once your company has filed its taxes using a calendar or fiscal year, you're pretty much locked into it. And depending on how your business is set up, your choices may be limited in the first place:
- If you operate a sole proprietorship, you and your business must use the same tax year. And the vast majority of individuals pay taxes on a calendar-year schedule.
- Both S corporations and personal service corporations generally have to stick to the calendar year.
- In the case of a partnership, the company must use the same tax year as the majority of its owners; again, this is most often a calendar year.
However, outside of a sole proprietorship, if you can show there is a business reason for operating under a different tax year, the Internal Revenue Service can make an exception. That reason would likely be the natural seasonality of the business.
If you've already filed under a calendar year and want to move to a fiscal year, or vice versa, again, you have to show there is a legitimate business purpose for doing so. In the past, there were some tax advantages to separating your personal tax year from your company's tax year, but the IRS has worked to crackdown on those looking to switch strictly for tax purposes, Weltman says.
The area you have the most flexibility is if you are establishing a new C corporation. Depending on the capabilities of your accountant or finance department, you probably don't want to get too cute with this decision. Keeping things on a regular quarter (end of March, June, or September) will make reconciliation with other accounts, like payroll, much easier.