Should Your Small Business Use a Calendar Year or a Fiscal Year?
When you file your personal taxes, you do so based on the “calendar year,” which is the span between Jan. 1 and Dec. 31 of a given year. Numerous businesses tackle their taxes using the same time period – but not all of them.
Some of them use the so-called fiscal year.
It might seem like a trivial difference, given that both “years” cover the same ground – 365 days. (Well, 366 every four years). But as it turns out, there are a few reasons why new small business owners might want to spend a little time thinking about whether they should eschew the traditional calendar year and operate under a fiscal year instead.
Calendar Year vs. Fiscal Year
First, a quick look at the difference between the two:
As mentioned before, the calendar year starts on Jan. 1 of a year and ends on Dec. 31 of the same year.
A fiscal year is a 12-month period that starts at the beginning of any month except January, and ends on the last day of a month. But you can also use a 52-53-week tax year that may flip between 52 and 53 weeks, and it does not have to end on the last day of the month; for instance, a fiscal year could always end on the final Friday in June.
Why Would You Use a Fiscal Year?
One way to think about a financial year is how it tells the story of your small business over time.
Some companies, such as Facebook, have a pretty fluid business that might fluctuate a little from month to month, but mostly speaking don’t experience a ton of seasonality. In situations like that, calendar years make a ton of sense.
That said, some companies in specific industries – think do-it-yourself retailers, which see peak sales in spring, or tax preparers, whose busiest season is the first few months of the year – have “lumpier” financial schedules that might be better told through a fiscal year. Indeed, Lowe’s and Home Depot both use fiscal years that begin in February of one calendar year and end in January of the following calendar year. Tax preparer H&R block have a fiscal year that closes at the end of April – right after the April 15 tax filing deadline.
Here’s a hypothetical: Let’s say you own a winter sports-focused business that makes the majority of its revenues between November and February. A calendar year would split a single winter season in half, whereas a calendar year ending in February would capture winter season’s full picture.
Another hypothetical: Let’s say you own a small manufacturing business that tends to make a lot of expenditures in November and December in preparation for peak activity that starts in spring. You’re recording a lot of expenses in one calendar year, but you’re not seeing the resulting revenues from those expenses until the following calendar year. A fiscal year gives you a more accurate picture of your particular business cycle.
A Fiscal Year Isn’t for Everyone, Though
Business structure is important when determining whether you will use a calendar year or a fiscal year.
If your small business is structured as a corporation, you’re allowed to use either, and can inform the IRS with a simple notification on your first tax return – though after that, you must send a request to the IRS.
However, if you’re a sole proprietorship, a partnership or a limited liability company (LLC), you must request the IRS’ consent no matter what, which includes showing the business explanation as to why you should use a fiscal year over a calendar year.
Even seemingly small decisions like this can make a big difference in your accounting and tax returns. So don’t take it lightly, and consult with a tax professional to determine what accounting year is right for you and your small business.
McManamon & Co. is an accounting and business services firm that offers numerous tax services and can help you get a read on whether you should adopt a fiscal year – and if so, what time period makes the most sense based on your company’s unique story.
Give us a call at440.892.9088 or contact us online, and we can help you with a laundry list of tax issues, including which type of year is right for you.
Tags: accounting, calendar year, fiscal year, McManamon, small business | Posted in accounting, McManamon & Co., small business