How to Choose Between Fiscal and Calendar Year End
For annual taxation purposes, the IRS allows business owners to choose between a fiscal year end and a calendar year end to report their annual earnings. When choosing to decide which option is best for your business, it is important to understand the differences between the Fiscal and Calendar Year End options.
Calendar Year End
A calendar year end reporting schedule is the most conventional reporting time frame, dating from January 1st through December 31st for the current year’s earnings. While the IRS allows business owners to choose any fiscal year they like, keep in mind that some businesses are generally mandated to follow the calendar year end if they do not keep books or records. Most self-employed individuals usually fall into this category, since sole proprietors don’t exist apart from their owner, and are required to follow the calendar year end reporting and tax requirements.
Fiscal Year End
In comparison, a fiscal year end covers a one year time frame that ends on the last day of any month, with the exception of the month of December. For example, companies having a fiscal year ending on August 31st, reporting will cover the previous 12 consecutive month period. For this company, the fiscal year would be September 1st – August 31st, with this time frame becoming the official accounting period for the organization. When choosing to file your annual earnings on a fiscal year end schedule, tax returns are due on the fourth month following the conclusion of the determined fiscal year end. For companies with a fiscal year end of August 31st, the tax returns are due on December 15th of the same year.
Why Switch to a Fiscal Year?
One reason to switch to a calendar year is the better match your business income and expenses for the chosen reporting year. If you are a seasonal business that generally incurs the bulk of the yearly expenses from October – December, but income is generally generated from March – May, your expenses and income wouldn’t be matched for a calendar year. Adopting a fiscal year schedule would help to better match your income and expenses on an annual basis.
In order to change your tax filing schedule, business owners will need to file an Application to Adopt, Change or Retain a Tax Year through the IRS, using IRS Form 1128.