Perhaps you have just started a new business and you’re wondering how to choose the right accounting year for your business. Basically, there are two kinds of tax years: the fiscal tax year and the regular calendar year. The choice of your accounting year will significantly affect your accounting strategy and business taxes as you grow. It’s important to get it right the first time because it may be difficult to make changes on your accounting year later.
Calendar Year vs Fiscal Year
Before you determine the appropriate tax year for your business, you need to learn the difference between a calendar year and a fiscal year. Unlike the calendar year that begins on January 1 and ends on December 31, the fiscal year doesn’t necessarily start and stop at the same time. For instance, it may start on June 1, 2018, and end on May 31, 2019, which means that whatever you spend in August 2018 will part of your 2019 fiscal year. It is simply a 12-month timeline that normally ends on the last day of any month other than the month of December.
When You Must Use a Calendar Year For Your Business
There are several reasons that make you use a calendar year:
- If your business has no bookkeeping records yet.
- If there is no annual accounting period yet.
- The code of tax regulation requires the business to use a calendar year.
- Your business is a sole proprietorship or a partnership.
- Your business is an S corporation.
- Your business is a limited liability company (LLC).
When To Use a Fiscal Tax Year
When you want to present a more accurate picture of your company’s performance, then fiscal tax year makes more sense. This is common for seasonal businesses.
The fiscal year can complicate your taxes and bookkeeping. It may require the support of experienced bookkeeping and accounting professionals. However, taxpayers with enough resources may choose an alternative fiscal year that is beneficial to them based on the uniqueness of their business activities. For instance, a business may choose May 31 as the end of their fiscal year because most of their work ends on April 15 and it may take them 5 to 6 weeks to collect payments from customers.
Be Tax-Ready with Norton Financials
If you need help in this area, partner with Norton Financials for the best financial advice. We provide tax preparation and planning, bookkeeping and accounting services for small businesses. Our organized team will give you reliable and tax-ready financial statements at month-end.