How does a business choose whether to operate on a calendar year or a fiscal year? That is a question I am frequently asked. The follow-up question is, “What difference does it make?”
A calendar year, obviously, runs from January 1 to December 31, just like the calendar on your wall. A fiscal year is any twelve-month period that begins and ends differently than the calendar. For example, the fiscal year for schools is usually July 1 to June 30. That way, their accounting and tax records conclude at about the same time that the school year ends and students are off for the summer.
Under IRS rules, a tax return is usually due on the 15th day of the fourth month after the end of the tax year. If the tax year is a calendar year, as it most often is, then the return is due on April 15, a date we are all familiar with (for corporations, the deadline is the 15th day of the third month following the tax year, or March 15 for a calendar year).
However, the rule does not specifically say “April 15” or “March 15,” because if the fiscal year is different than the calendar year, those dates fall somewhere in the middle, and a year’s worth of accounting is not available from which to prepare a return. For an entity like our school example above, the 15th day of the fourth month after the end of the tax year would be October 15.
So, back to our original question: If the tax return is always due a fixed number of months after the tax year, why do some entities choose to operate on a fiscal year-basis? The answer is that it’s almost always a matter of convenience, and in the absence of any compelling reason, they will usually just stick with a calendar year.
For example, a ski resort has its busiest season in the winter. There is no way they want to prepare their tax return in the middle of March, so they might choose a fiscal year that runs from July 1 to June 30. Or it could just be personal preference. Maybe the president of the company always goes to the Bahamas in the spring and doesn't want to mess with his taxes until he gets back. Or it could have nothing to do with taxes. Maybe in a seasonal business, they wanted to make sure they captured their most lucrative month their first year so that their profits would be higher, enabling them to qualify for bigger loans, and that's what they've been doing ever since. That sort of thing.
Can an individual taxpayer file on a fiscal year-basis, or is that something reserved only for businesses? The answer is that individual taxpayers can elect to file on a fiscal year-basis. Perhaps partners in a seasonal business, with an accounting year of October 1 to September 30, want their personal returns prepared at the same time as their partnership return. They can elect to file on January 15, just like their business.
But to be honest, it's very rare, even though it is possible. I've never had a client that didn't just operate on a regular calendar-year basis, even if they own a business. Usually, its only large corporations that do -- the IRS actually places restrictions on any other entities electing to use a fiscal year, and only allows it when certain conditions are met.
It's also something that is generally chosen when you file your first return. After that, it's considered that you've already made your choice, and you have to get special permission from the IRS to change, using Form 1128, Application to Adopt, Change or Retain a Tax Year.
If you think a fiscal year is something you might want to consider, please feel free to contact me and we can discuss the options. It is actually a complicated process because it requires either a short-year return or a deferral period of several extra months in the year that the change occurs, which is one reason that IRS approval is not always automatic