All businesses have a fiscal year. It is the financial year of a company, which is the 12-month period that the company sets for accounting. It is shown by mentioning the year-end date and in most cases, it is the end of any quarter, for example, March 31, June 30, September 30, or December 31.
According to the IRS, a fiscal year is a period of 12 consecutive months that end on the last day of any month excluding December.
Fiscal Year Vs. a Tax Year
The tax year is the year that the IRS uses for taxation purposes. It is a 12-month accounting period for maintaining the records. For the purpose of taxes, businesses can either use a calendar year as a tax year or the fiscal year as a business tax year.
The fiscal year is usually the tax year in a lot of cases but it is not mandatory. It is possible that a corporation that has a March 31 fiscal year-end also files its income tax return, effective March 31.
It is important to understand that the fiscal year is an internal issue for the business and at the end of the year, you need to report the financial situation of the business to the shareholders. The tax year is external, it is a 12-month period you use for the purpose of taxation.
Importance of the Fiscal year
The fiscal year is important for different types of businesses. A seasonal business will come with its ups and downs and this will help you decide if you want to have the fiscal year to be at the end of a quarter. It will become easier for you to understand how the business has fared this year.
Usage of the Fiscal Year
The fiscal year is mainly used for taxation purposes. Many businesses file their tax return on a fiscal year basis instead of a calendar year. Corporations, Partnerships, and S Corporation often have a calendar year-end that is different from the fiscal year-end. The fiscal year helps determine the income tax return filing dates and due dates in case of extensions.
Is there a Law for Determining the Fiscal Year?
The business can have any fiscal year but it is not possible to have NO fiscal year. The IRS will require a date. A sole proprietorship should use December 31 as the tax year for the business. Since single-member LLCs are taxed as sole proprietorships, they have to use the same fiscal year as a sole proprietorship.
If the business is not a sole proprietorship, you can choose the end of any quarter for the fiscal year-end. It is possible for anyone to adopt the calendar year as the tax year. In the case of the below-mentioned circumstances, it is important to adopt the calendar year:
- There are no records or books,
- You do not have an accounting period,
- The present tax year is not the fiscal year,
- It is required to use a calendar year by a provision of the Income Tax Regulations.
Can I change the year?
The fiscal year remains an internal concern and the business can make alterations to it. When you change the fiscal year, it is important to change the tax year. If you want to change the tax year, you need the approval of the IRS. Changing the tax year to fiscal year is more complex than it seems.
What is a Short Year?
A short year is a period that is less than 12 months. It is possible for a business to have a short tax year if you incorporated the business or ended the business during the year. If you change the tax year during the year, you will have a short year. It is important to file a tax return even in case of a short tax year.
Besides reporting the accounting year on the Employer ID application, there is no requirement to report the fiscal year to the IRS. However, you need to let the IRS know which tax year you are using.