Tax Tips for Entrepreneurs
Calendar Year Versus Fiscal Year for Small Business Taxes
When it comes to income tax reporting, your company may not be required to adopt the calendar year as your tax year. Instead, you can choose to establish your own fiscal year for tax purposes.
Accurate income tax reporting is an art form.
Although most business owners willingly comply with IRS tax codes, they also recognize the value of exploring ways to minimize their company's tax burden. This often means applying a certain amount of creativity to the tax reporting process.
One of the ways businesses manage their tax burden and reporting requirements is to adopt a fiscal tax year rather than a calendar tax year. Unfortunately, established businesses that have already filed a return can encounter difficulties changing their tax year strategy for subsequent filing years. But for first-time business filers, the calendar year vs. tax year issue is an important decision that will affect the company's filing status for years to come.
IRS Tax Year Rules
The IRS requires all taxpayers to define their tax period or taxable year. Tax year selection is usually tied to the company's accounting period; it can be challenging to maintain two different systems for accounting and reporting purposes. IRS rules mandate that the tax year must be based on a twelve-month period and once a selection is made, the decision is final. Your company cannot change tax years unless you receive permission from the IRS by filing Form 1128, Application to Adopt, Change, or Retain a Tax Year.
Benefits of Calendar Year Reporting
Calendar year reporting is the most straightforward way to manage the tax year. The calendar year runs from January 1st to December 31st, and all published IRS deadlines are designed to accommodate calendar year filers. For small business employers, calendar year reporting also syncs your reporting periods with your employees since nearly all individual taxpayers operate on a calendar year reporting system. In certain instances, the IRS may even require taxpayers and businesses to adopt a calendar year reporting system.
Benefits of Fiscal Year Reporting
Fiscal year reporting is an attractive alternative for companies with business cycles that are out-of-sync with the calendar year. Agricultural entities, corporations, and other types of businesses often find that the adoption of a fiscal year is more advantageous for their financial reporting and choose to adopt the same fiscal year for tax reporting purposes. Small businesses that outsource accounting can potentially save money by adopting a fiscal year that leverages accountant discounts outside of the annual April 15th filing rush. If you choose to adopt a fiscal year, you must do so on your business' first annual return, choosing a tax year that includes twelve consecutive months that end on any day except December 31st.
Share this article
Additional Resources for Entrepreneurs
Conversation Board
We greatly appreciate any advice you can provide on this topic. Please contribute your insights on this topic so others can benefit.