Your taxable income is based on a "tax year", a year period of your choosing. This means that a tax year can be any of the following:
- 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 a tax year based on what is most convenient for your business. You can adopt a tax year by filing your first income tax return as the date of that return triggers your tax year. However, you are obligated to use the tax calendar year if any of the following apply to you:
- 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 IRS provisions if you're not sure whether it applies to you)
If you file for an employer ID number, an extension on your income tax return, or pay estimated taxes for a tax year, you have not adopted a tax year. If you file your first tax return with the calendar tax year and later start a business or become an owner, you must continue using the tax calendar year unless you get IRS approval to change. Receive approval by filing form 1128 Application to Adopt, Change or Retain a Tax Year. Once you change your accounting period, you'll pay taxes based on a "short tax year" of less than 12 months, until the next time you 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.
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.