Choosing when to begin your fiscal year is one of the first steps when starting a business. Deciding on a fiscal year start date may not sound crucial, but this small step can significantly impact your business.
Your fiscal year dictates your business strategy and income tax return filing time frame. It determines how you’ll track your company’s financial status and report it to your shareholders. A strategically planned fiscal period can also improve operations, cut costs and help you find investors for your business.
We’ll explain what a fiscal year is and explore the factors involved in choosing when to begin your fiscal year.
A fiscal year is a 12-month financial tracking period. Its start marks the beginning of a company’s annual financial records and accounting cycle. At the end of these 12 months, you have a year’s worth of financial data to help you file taxes and determine your business’s financial health.
Unlike a regular year, a fiscal year doesn’t have to start on January 1 and end on December 31. You can start it at any point as long as it spans 12 consecutive months.
As a business owner, you get to adopt the fiscal year that makes the most sense for your company. You can choose from:
Following the calendar year is a straightforward option. However, this doesn’t work for all businesses and industries. When choosing a fiscal year, you must consider several factors, including the nature of your business, taxes and seasonal variations in your company’s activities.
While you can start your fiscal year anytime, business owners typically kick off their fiscal year at the beginning of certain quarters. However, fiscal years are usually expressed as a year-end date, so you’ll often hear people discuss “the fiscal year ending March 31” or “the fiscal year ending September 30.”
When budget planning, businesses must examine revenue and expenses for the calendar year and fiscal year, analyzing the previous year’s expenditures and projecting whether they’ll spend the same, more or less in the upcoming year.
Here are a few questions to ask when choosing a fiscal year for your company:
To choose the best fiscal year for your business, decide on your primary goal. Some goals might include:
Consider the following factors when deciding on your fiscal year’s start:
If you’re the sole proprietor of your company, the Income Tax Act requires that you follow the standard tax year. The same is true if you are a shareholder in an S corporation or your business is registered as a single-member limited liability company (LLC). If the business is a partnership, then its tax year must be the same as the tax year of the partners.
Along with sole proprietorships, partnerships, S corporations and LLCs, the fiscal year-end of personal service corporations must also follow the calendar year.
Regular C corporations may or may not follow the calendar year, depending on which is more advantageous.
While the IRS would rather have small businesses following the calendar year, it will grant permission for you to follow any fiscal year if there’s a compelling reason. For example, you may choose to follow a financial accounting period based on the natural sales cycle of businesses in your industry.
If your business doesn’t experience significant sales volume changes over the year, conforming to the standard calendar year should work well. However, if your business undergoes pronounced seasonal variations, you may opt for a fiscal year that follows the natural sales cycle of your industry.
Is your business taxed according to the calendar year? If not, you may choose to base your fiscal year at the end of the busiest time for your business. For example, consider the following:
Have you hired an accountant to manage your financial statements? If so, you may save money by following a fiscal year that doesn’t conform to the calendar year.
Accounting firms are also seasonal businesses. They usually peak during the end of the standard calendar year, when most companies traditionally close their books. If you choose to wrap up your financial year at a different time, you may enjoy your accountant’s off-season rate and save some cash.
Accountants also typically have busy seasons near the end of each quarter, so you also might want to avoid those periods.
Business owners may also decide on a fiscal year based on some additional factors, including the following:
You may change your current fiscal year for various reasons. But if you do, you must also change your tax year. And this is where it gets tricky.
To change your tax year, you must get permission from the IRS. This means filing IRS Form 1128 (Application to Adopt, Change, or Retain a Tax Year). Personal services corporations, S corporations and partnerships may need to file IRS Form 8716 to use a tax year other than the calendar year.
If you’re doing this for the first time, consider getting a tax attorney’s help. The questions are numerous and complicated, and you’ll want to ensure you answer everything correctly. To get approval, follow the guidelines laid out by the IRS and have a legitimate business reason for requesting the change.
The IRS will give some organizations automatic approval for changing their fiscal year. If you qualify for this, there is no fee.
To be considered for automatic approval, your business:
Instead of changing your fiscal year somewhere down the road, avoid the hassle by making a well-informed decision at the start. Do the necessary research and talk to a tax consultant or accounting expert before deciding.
How you set up your fiscal year affects every aspect of your business, including your financial strategy, taxes, recordkeeping and business growth. But don’t be daunted. Keep the questions, factors and advice here in mind, and consult a professional to determine the best fiscal year for your business.
Jennifer Dublino contributed to the reporting and writing in this article.