When to Start a Tax Year for a Small Business

It can be confusing to figure out when to start a tax year for a small business, but it doesn't need to be. Before you decide anything, you should know your options. Your taxable income is based on a “tax year”, for which you file an income tax return. A tax year is any annual accounting period lasting 12 months, during which you keep records and report income and expenses. A tax year can either be:

• A regular calendar year of 12 consecutive months (January 1st - December 31st).
• A fiscal year of 12 consecutive months, ending on the last day of any month
• A fiscal year of 12 consecutive months (52-53 weeks) that does not necessarily end on the last day of a month.

Both fiscal and calendar tax years cover the same amount of time, so choose an accounting period or tax year based on what is most convenient for your business. You can easily adopt a tax year by filing your first income tax return using that year. However, if any of the following circumstances apply to you, you are obligated to use the tax calendar year:

• You don’t keep records or books
• You don’t have an annual accounting period
• Your current tax year is not a fiscal tax year
• You are required to use the calendar year under the Internal Revenue Code and Income Tax Regulations (check their provisions if you’re not sure whether it applies to you)

If you only filed for an employer ID number, filed for a filing extension on your income tax return, or paid estimated taxes for a tax year, you have not actually adopted a tax year.  If you file your first tax return with the calendar tax year, and you later start a business or become an owner, you have to continue to use the tax calendar year unless you get IRS approval to change your tax year. You can get this approval by filing form 1128 Application to Adopt, Change or Retain a Tax Year. Once you’ve changed your accounting period, you’ll pay taxes based on a “short tax year” of less than 12 months, until the next time you can file for a full tax year under your new accounting plan.

Short tax years also exist for those who are born or died part way through the tax year, since a tax return is still required for the period that person was alive. 

As a small business owner, you may want to check out the IRS’s calendar for small businesses, which can help you organize and plan ahead.

For more information about business taxes, go to www.irs.gov.

Laws on this topic may vary from state to state. This content is not meant to provide you with complete information and it is not intended to be legal or tax advice. It is recommended that you consult with your own attorney, accountant or other advisor regarding your specific situation.