If you’ve just started a new business, you may have to decide which tax year is best for your business. Some of you may be panicking and asking yourself, there’s more than one financial year? Don’t worry! It’s fairly simple and by the end of this article you should be well on your way.
There are two kinds of tax years. There is the run of the mill calendar year that you already use for your personal taxes. There’s is also the fiscal tax year, where you decide your own start and end dates for reporting your tax year.
Before we dive in
The first step is to determine whether or not your business qualifies for a fiscal year tax system. If your business is a partnership or a limited liability company (LLC) you will have to use the same tax year as you would personally. Also, if you’re an S corporation you will most probably have to use a calendar tax year. Sole proprietors are indistinguishable from their owners so they need to use the calendar tax year. However, if your company is not any of the above, you have the option of changing your accounting period to suit your business.
The calendar tax year is straightforward and relatively painless. Many small businesses use this method. It involves tracking and reporting income and expenses just like individual taxpayers do. You report your expenses and income to the IRS on an annual basis from January 1st to December 31st, just like your personal taxes. While this doesn’t take into account your specific business needs, it is familiar and easy to deal with.
Fiscal Tax Year
The advantage of the fiscal tax year in comparison to a calendar year is its flexibility. A fiscal year allows you to match your income and expenses in a time period that works best for you. For example, if you have a seasonal business, a calendar year would split your season and the resulting income and expenses into two years. Imagine you have a ski rental business. The bulk of your income is generated in December and March. However, you incur the majority of your expenses in June/July when you do repairs and restock all your equipment. So, a regular calendar year would split these times and divide your expenses and income. Consequently, a fiscal year would be advantageous as you could determine the year based around your seasonality and match your expenses to your income.
How can I change my tax year?
If you’ve already a tax year, but you’ve decided you’d like to change it, you may need to get approval from the IRS. Check out Form 1128, Application To Adopt, Change, or Retain a Tax Year to see the requirements. Or you can talk to your financial advisor about which tax year would work best for your business. If you’re looking for help in this area, get a free consultation and we can help.