Time to Startup!

The BizFilings blog covering business tips and trends.

New Businesses Have a Decision to Make -- the Calendar or Fiscal Year?

Published on Mar 8, 2013

Summary

Read 'New Businesses Have a Decision to Make -- the Calendar or Fiscal Year?' at 'Time to Start Up,' the small business blog by BizFilings.
There are plenty of exciting decisions that an entrepreneur gets to make when starting a business, such as naming the business, creating a logo, and pricing a product or service. And then there are the mundane decisions, which are no less important for the long-term viability of the business. One of those questions may center on which kind of tax year is right for your small business. What is a tax year? It is an accounting period for which you must report your taxable income and business expenses. There are two types of accounting periods -- the calendar year and the fiscal year, and there are advantages and disadvantages to each.

Consider the calendar year. The advantages are:

  • It’s very simple. It matches the period you track for your personal return -- from January 1 to December 31.
  • It’s compliant with many designations. If your business is legally structured as a sole proprietorship, for example, you and your business must use the calendar year. Both S corporations and personal service corporations typically use the calendar year.
There are also advantages with the fiscal tax year, which encompasses a period of 12 consecutive months that ends on a date other than December 31. Among them are:
  • It works well for a business that is seasonal in nature, such as an agricultural operation or a ski resort.
Typically, C corporations have the most choice about whether to follow a calendar year or fiscal year. The Internal Revenue Service does note that “if any of the following apply, you must adopt the calendar year.”
  • You keep no books or records;
  • You have no annual accounting period;
  • Your present tax year does not qualify as a fiscal year; or
  • You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.
Businesses currently operating under a calendar year that become seasonal do have an opportunity to appeal to the IRS for a switch to fiscal year. To get approval, the company must file Form 1128, Application To Adopt, Change, or Retain a Tax Year.