What is a tax year for businesses?
Every taxpayer in the U.S., including businesses, is subject to a 12-month tax period for calculating and paying taxes, and filing business tax returns. The term “tax year” refers to this annual accounting period. While individual taxpayers are on a calendar year schedule (the 12-month period from Jan. 1 to Dec. 31), many businesses opt for an alternate accounting period and may opt instead for a different fiscal year.
Like a calendar year, a fiscal year is 12 consecutive months long. A fiscal tax year, however, ends in a month other than December. For example, a business might choose a fiscal year beginning May 1 and ending April 30.
Some businesses may have special accounting needs, which make a fiscal tax year more attractive than a calendar tax year. For example, a seasonal business that typically earns higher income during a certain quarter may opt to end their fiscal year after that prosperous period. One benefit of a fiscal tax period is that the business can complete annual accounting and meet tax obligations during a slower period.
Note that a “short tax year” is used for businesses which are not in existence for an entire 12-month accounting period. Your business may also have a short year if you change the accounting period during the year.
When is the right time to start my business tax year?
The right time depends largely on the nature of your business. Some self-employed people are required to adopt a calendar tax year (see below). Other business owners have flexibility to choose either a calendar year or a fiscal year for tax preparation and filing.
This decision is usually based on an industry’s business cycle. A business which has its busiest period in the first part of the year might choose a March 31 fiscal year end. In contrast, a business that is busy during the November-December holiday season each year might opt to use a calendar year for tax and accounting purposes.
When you apply for an Employer Identification Number (EIN), you identify the month you will use as your closing month for accounting and tax filing purposes. If you do not elect a specific fiscal tax year for your business taxes, the IRS automatically sets a calendar year accounting period based on a Dec. 31 end date, just like your personal income tax return.
The Small Business Tax Worksheet can help you with key tax decisions and can provide additional guidance and resources designed to help you better understand and meet your tax obligations as a small business owner.
Can I change my business’s tax year?
In some cases, entrepreneurs start their businesses using a calendar year but later realize that a fiscal accounting period may be more beneficial. Unless your business is required to use a calendar tax year (see below), you may change from a calendar year to a fiscal year.
If you decide to change your accounting period for tax purposes, the IRS must first approve the change. Changing the tax year for your small business can be complex. Your Corporate Bylaws or Operating Agreement, however, may address the procedure. For example, if your business is structured as an S corporation, you will likely use IRS Form 1128 – Application To Adopt, Change, or Retain a Tax Year. Some businesses, however, may instead use IRS Form 8716 – Election To Have a Tax Year Other Than a Required Tax Year. If you need tax help, Rocket Lawyer can now match you with a tax pro for affordable and convenient tax filing services.
Is my business required to use the calendar year as its tax year?
C-corporations may be structured under either a calendar year or fiscal year. Small businesses can choose the federal tax and accounting schedule that works best for them. Some business taxpayers, however, are required to adopt a calendar year for tax purposes. If any of the following factors apply to your business, IRS rules require a Jan. 1 to Dec. 31 tax year:
-
Your business is a single-member Limited Liability Company (LLC) or a sole proprietorship (sole proprietor income is reported on Schedule C of your individual Form 1040).
-
Your business is a partnership and the partners use a calendar tax year.
-
You do not keep any books or records for the business.
-
You do not have an annual accounting period.
-
Your current tax period does not meet IRS qualifications to be a fiscal tax year.
-
A specific provision of the Internal Revenue Code (IRC) or the Income Tax Regulations requires your type of business to adopt a calendar year accounting period.
If you need help evaluating your options for a small business tax year, reach out to a Rocket Lawyer network attorney for affordable tax and legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
