Customizing Your Annual Business Taxes
When Mark Haag opened his company in 1990, the owner of Staffease, Inc. chose his tax year-end based on the nature of his business.
“I made a conscious decision to use a calendar year-end, because I run a payroll company and it made sense to close my year at the same time that I finalize client payrolls,” says Haag, whose company is now in 20 states and employs 690 people. “With a calendar year-end, we all start fresh every January.”
Planned Tax Year
If your company structure allows it, putting some thought into your tax year-end is advisable, says David Stevens, a certified public accountant serving small businesses and their owners throughout California.
“Companies set up as sole proprietorships are limited to a calendar year-end, but other types of business structures can choose their year-end,” says Stevens, whose clients are in the manufacturing, wholesaling and service industries.
The IRS recognizes two tax years. The calendar year runs for 12 consecutive months, beginning January 1st and ending December 31st. A fiscal year refers to a period of 12 months that completes at the end of any month except December, for instance, from April 1st in one year to March 31st of the following year. What type of year-end a company chooses depends on several factors.
If you’re involved in a partnership, your year-end must coincide with the tax year of the members of the partnership. If all members are on a calendar year, then that’s what you’ll have to use, but if there are members with year-ends at other times of the year, then your company will usually need to adopt the fiscal year-end of the majority of the partnership.
Businesses set up as S corporations are typically on a calendar year, but there are exceptions. Such companies can request a different year-end—such as October 31—as long as it falls within three months of the calendar year-end. Such a move isn’t always advantageous tax-wise, though, says Stevens.
“The IRS requires a tax deposit for the amount of income you’re deferring during those remaining months, which they’ll hold until the following year,” he says. “Having to make that deposit generally negates any advantages you’ll get from adopting a fiscal year-end.”
In some limited instances, individuals who run an S corporation can adopt a fiscal year-end without making the deposit, if they experience 25 percent of their gross receipts within the last two months of their fiscal year. Generally, only seasonal businesses fall into this category, such as those that peak in the spring, summer or fall. According to Stevens, a company that sells Halloween merchandise or a Christmas tree farm might qualify.
When your business is set up as a C corporation, you have the most flexibility in choosing a year-end. If you decide that January 31st is an ideal fiscal year-end, there are no limitations on you choosing this date.
52–53 Week Tax Year
A variation on the year-end available to businesses is what is known as the 52–53 week tax year, which according to Stevens, is often popular with retailers. This fiscal year-end allows businesses to always end each year on the same day of the week for the sake of continuity.
For instance, if you elect to end your fiscal year on the last Sunday of the year, then you do so no matter the date, which could be the 29th. Because of this manipulation of dates, about every four years you will experience a 53-week year. The 52–53 week tax year can be adopted using any fiscal year-end.
Carefully Choose Your Year-End
If you are able to choose your fiscal year-end, Stevens suggests analyzing the natural flow of your business and ending the year in your slowest month. “Your staff won’t be as busy when things are slow, and they can devote themselves to closing the books,” he says. “Your inventory will also be at its lowest point, which means less work counting and pricing.”
If you want to change your year-end, you need permission from the IRS, as well as a valid explanation of why you wish to make the change. Tax avoidance is not an acceptable reason. Requests for changes are made by completing IRS form 1128.
When setting up your business, choose your tax year wisely. Once set, your fiscal year-end is difficult, or even impossible, to change.
A freelancer since 1985, Julie Bawden-Davis has written for many publications, including Entrepreneur, Better Homes & Gardens and Family Circle. Julie blogs via Contently.com.
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