If you’re the sole proprietor of your company, the Income Tax Act requires that you follow the standard tax year. The same is true if you are a shareholder in an S corporation or your business is registered as a single-member limited liability company (LLC). If the business is a partnership, then its tax year must be the same as the tax year of the partners. Please note that a natural business year may not align with the calendar year, which runs from January 1 to December 31. A fiscal year, on the other hand, is any 12-month period that a company uses for accounting purposes.
For example, nonprofit organizations often align their fiscal years with the timing of grant awards. How you set up your fiscal year affects every aspect of your business, including your financial strategy, taxes, recordkeeping and business growth. Keep the questions, factors and advice here in mind, and consult a professional to determine the best fiscal year for your business. Instead of changing your fiscal year somewhere down the road, avoid the hassle by making a well-informed decision at the start. Do the necessary research and talk to a tax consultant or accounting expert before deciding. Accountants also typically have busy seasons near the end of each quarter, so you also might want to avoid those periods.
- The tax year you choose may determine the accuracy
with which your business’s income is matched with the expenses that
generate the income. - This is especially the case for companies that do business in seasonal industries.
- While the IRS would rather have small businesses following the calendar year, it will grant permission for you to follow any fiscal year if there’s a compelling reason.
This is because it may provide a more accurate reflection of the company’s operations, allowing for revenues and expenses to better align. For instance, it is common for retail natural business year companies to end their fiscal year on Jan. 31, after the holiday season has ended. Walmart and Target are two primary examples of companies that use this fiscal year.
What is a Natural Business Year?
In this case, the fiscal year would end on the same day of the week each year, whichever is the closest to a certain date–such as the nearest Saturday to Dec. 31. This system automatically results in some 52-week fiscal years and some 53-week fiscal years. If your business doesn’t experience significant sales volume changes over the year, conforming to the standard calendar year should work well. However, if your business undergoes pronounced seasonal variations, you may opt for a fiscal year that follows the natural sales cycle of your industry.
To get permission you
must demonstrate to the IRS’s satisfaction that you have a valid business
purpose other than tax avoidance. In many cases, a seasonal business
would be able to show a valid business purpose for using a fiscal
year. You can request approval by filing IRS Form 1128, Application
to Adopt, Change, or Retain a Tax Year. A natural business year is a period of 12 consecutive months, terminating in a natural low point in the sales activity of a business. More specifically, there should be a decline in the accounts receivable, accounts payable, and inventory that a business states in its accounting records. At this point, more receivables than usual have been converted into cash, and inventory balances have been drawn down.
For countries like the United States that follow the Gregorian calendar, this means it begins on Jan. 1 and ends on Dec. 31. Businesses using the calendar year for financial reporting will prepare their statements based on transactions taking place between these dates. According to the IRS, a fiscal year consists of 12 consecutive months ending on the last day of any month except December. Alternatively, instead of observing a 12-month fiscal year, U.S. taxpayers may observe a 52- to 53-week fiscal year.
This is often industry-specific, depending on the annual cycle of business operations. Harold Averkamp (CPA, MBA) has worked as a university accounting instructor, accountant, and consultant for more than 25 years. On the other hand, some companies are required by government regulations to end their accounting years on December 31, even though it is not the end of their natural business year. Discover the principles of basic accounting and learn essential accounting terminology. As with a fiscal year, a calendar year also describes a consecutive twelve-month period.
Picking a fiscal year that aligns with your natural business year can also make your business look better on the financial statements you hand over to investors and creditors. 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 have to get IRS approval to use a fiscal year by filing Form 1128. In this case, the firm may choose an alternate fiscal year-end date, such as Jan. 31 rather than Dec. 31. As another example, the best time for a luxury resort to report earnings is probably after vacation season, so it may choose a fiscal year-end of Sept. 30. Macy’s Inc. (M) ends its fiscal year on the fifth Saturday of the new calendar year.
Filing as a fiscal year taxpayer
Exceptions to these general rules may be made
if you can establish to the satisfaction of the IRS that you have
a business purpose for using a different tax year. Your tax year determines the time frame in which your taxable
income will be computed. All income received or accrued within a single
year is reported on that year’s tax return, along with all expenses
paid or accrued.
For example, if your fiscal year ends June 30th, you must file by October 15th. As such, analysts must be careful to compare two companies over the same time period. If comparing two companies with different fiscal years, analysts must adjust the data to ensure the information for both firms covers the same time frame so as not to skew the comparison one way or another. This is especially the case for companies that do business in seasonal industries. A partnership or LLC
must generally use the same tax year as the majority of its owners. An S corporation or a personal service corporation must generally
use a calendar year.
Définition de natural business year en anglais
This means that a company opens its books on January 1st and closes its books on December 31st. In this scenario, the company might choose to have a fiscal year that ends in late winter or early spring, such as at the end of February. This would be the company’s natural business year because it aligns with the annual cycle of its business operations. If you want to switch from a calendar year to a fiscal year (or vice
versa), you’ll need permission from the IRS.
If you’re doing this for the first time, consider getting a tax attorney’s help. The questions are numerous and complicated, and you’ll want to ensure you answer everything correctly. To get approval, follow the guidelines laid out by the IRS and have a legitimate business reason for requesting the change. This means filing IRS Form 1128 (Application to Adopt, Change, or Retain a Tax Year). Personal services corporations, S corporations and partnerships may need to file IRS Form 8716 to use a tax year other than the calendar year.
Below are 10-K reports from popular companies with fiscal years that don’t follow the calendar. A 10-K is an annual report of financial performance that is filed with the Securities and Exchange Commission (SEC). The default IRS system is based on the calendar year, so fiscal-year taxpayers have to make some adjustments to the deadlines for filing certain forms and making payments. While most taxpayers must file by April 15 following the year for which they are filing, fiscal-year taxpayers must file by the 15th day of the fourth month following the end of their fiscal year. For example, a business observing a fiscal year from June 1 to May 31 must submit its tax return by Sept. 15. A natural business year (NBY) is a fiscal year that ends when business activities are typically at a low point.
As the fall approaches, sales would begin to decline as customers have less need for these products. By the time winter arrives, the company’s business activities might be at a low point, with few sales of gardening equipment occurring. While many companies https://business-accounting.net/ have a fiscal year-end on the last day of December, others vary based on the industry of which they are part or some other business needs. Fiscal years that vary from a calendar year are typically chosen due to the specific nature of the business.
It is also important to note that the timing of a company’s fiscal year does not change the due date on taxes. If a company has a fiscal year-end that is the same as the calendar year-end, it means that the fiscal year ends on Dec. 31. However, companies have the ability to choose the best fiscal year-end for themselves, designed with the needs of the company in mind.
