How to choose a fiscal year for business?

How to choose a fiscal year for business?

A fiscal year, typically also known as the financial year or tax year or accounting year, consists of a twelve-month time frame that your accountant and the tax authorities (IRS) refer to for your financial reporting when you don’t adopt the conventional calendar year reporting.  A calendar year commences and ends from 1st January to 31st December.  However, a fiscal year is determined by you, so long as it is a twelve-month period.  In this article, we shall evaluate how to determine selection of a fiscal year for your business, also how your choice can affect your business and whether you would be better applying a calendar year only.

Traditionally, any small business would use a fiscal year for financial reporting for a couple of reasons primarily, firstly because they are in the process of fund raising via investments or loans and secondly, they are to file their first tax reporting and have the option to register as a fiscal tax assessee.

On the contrary, for other businesses, that usually undergo certain high and low periods during the year, because of the nature of their business, will opt a fiscal year instead of a calendar year. This could primarily be a choice because a.) that way the reporting would capture better the business performance and enable objective assessment, b.) it facilitates effective financial planning or 3.) the business runs on a large inventory.  Either way, the choice between fiscal year and calendar year is crucial and should best be derived at after due consultation with an experienced business accountant.

 

Type of Entity, Fiscal year & Tax filing

C Corporation – IRS has enabled an automatic approval route for the business owners to choose either the Calendar year or a Fiscal year of their choice.

S Corporation, Partnerships, Sole proprietorships – IRS requires such business owners to seek mandatory approval from itself before adoption of a fiscal year instead of a Calendar year.

Irrespective of the type of your business entity, to opt for a calendar year tax assessee, you only need to file your tax return before April 15th of the following year.  For a C Corporation, to switch from a fiscal year to calendar year is also simple, you only need to file your tax return before April 15th following the year for which you seek to file your taxes.  If you’re a C corporation and have never filed a return for your business and have decided to use your own fiscal year, file your return on or before the 15th day of the fourth month after the last day of your fiscal year. For example, if your fiscal year ends June 30th, you must file by October 15th.

For other businesses entity types, if you filed your last return using the calendar year and want to switch to a fiscal year, or you run a sole proprietorship, you need to get IRS approval to use a fiscal year by filing Form 1128.  If you run an S corporation or a partnership, you need to file Form 8716 to switch to a fiscal year.

 

How to choose your fiscal year end?

Nature business year end: This is a choice when your business as accomplished the bulk of its business and the activity or transactions are at their minimal.  Usually, seasonal businesses have obvious nature business year ends, whereas others don’t.

Industries having natural business years usually include:

Schools & Universities (based on the Education semesters or classes, commonly from July 1 to June 30),

Non-profits (based on any grants or award spending due dates),

Retail businesses (based on end of regional festivals, for e.g. post Christmas)

Agriculture (based on end of harvest season)

Choice of fiscal year or calendar year is significant for your business as it could ultimately better facilitate Management decisions, also aid your accounting process and provide better insights for your investors and creditors.

Schools and universities, which usually pick a fiscal year that corresponds with when classes are in session: from July 1 to June 30th, for example.

Nonprofits, which will often time their fiscal year to coincide with grant and award deadlines.

Retail, which places the end of their business year after Christmas, when holiday sales subside and inventories are at their lowest.

Agriculture, whose natural business year will usually end after the year’s biggest harvest.


Fiscal year vs calendar year: which one is better for my business?

If the end of your natural business year isn’t obvious, a fiscal year might still be better than the standard calendar year.

Remember, this isn’t just a tax consideration: picking an appropriate fiscal year could also make life easier for you, your accountant, your investors, and your creditors.

Ideally, the end of your fiscal year should coincide with the time of the year when you have the sparest time. This is so you can afford to take a step back from the business and do long-term planning, sign new contracts, create budgets, etc.  December 31st might happen to be that day for your business, but for many businesses it isn’t.  Picking a fiscal year end that is different from December 31st could spread the work out and make life easier for your accountant, and also potentially save you money.

The end of your natural business year is usually the time when you’re most likely to have converted your inventory to cash, and your current ratio is at its maximum (i.e. when you’re at your most liquid and capable of paying your debts).

Conclusion:

Finally, you need to consider various factors in consultation with your accountant in order to arrive at this decision on the choice of a fiscal year for the financial reporting of your business.  A well planed choice can go a long way in offering best financial and tax reporting for all stake owners in any business.

We trust this article was helpful to you in understanding in brief how to choose a fiscal year for your business.  Should you have any queries or need consultation with your application, Schedule a Call today or write to us at info@gjmco.in.

 

Thanks & Best regards,

Knowledge Base team

GJM & Co.

Chartered Accountants

www.gjmco.in

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