Whether you are establishing a new business or your business is expanding, the time frame (or period) in which your business maintains its records is important. There are certain accounting periods you can choose from; such as calendar year or fiscal year. As a business owner, you must decide how to maintain your records and reporting income and expenses. Does your business optimally operate within a calendar year or through a fiscal year? What are the differences between the two?
At MiklosCPA, our California-based accounting and tax preparation firm is here to ease some of your concerns and guide you through some basic concepts which will assist you to make the right determination when you first file your tax return.
Is a Calendar Year Right For You?
A calendar year is the twelve month period from January 1st to December 31st. Most individuals file their taxes using this period, and many businesses file this way by default due to:
- Not keeping books or records,
- Currently not having an annual accounting period,
- The present year does not qualify as a fiscal year
- Specific businesses required by a provision in the Internal Revenue Code that must file taxes using a calendar year.
Let’s say that you are just starting a Glendale-based graphic design business as a sole proprietor (Schedule C). You would continue to file your taxes using that same calendar year method that you have filed your previous individual tax returns.
If an individual or company files taxes using a calendar year then the calendar year serves as an accounting period is usually set in stone unless you receive an approval from the IRS.
Is Fiscal Year Right For You?
A fiscal year is a different way to measure a year. Your accounting period of your business may end on any day of the month except for December 31st. An easy way to think of a fiscal year is a year that looks different than the calendar on your wall. While most individuals and small businesses operate using a calendar year there are instances where it is beneficial to use fiscal.
For example, you operate a boat rental business in Newport Beach which sees the majority of its traffic and revenues during the lovely summer months. The majority of storage and repair expenses occur in the winter of the next calendar year. So your fiscal year ends in September rather than December. It may be beneficial to make the fiscal year as your default accounting period. This is especially true when your business is in need of a loan. In this case you would want to apply for the loan after the lucrative months because it could qualify you for a larger loan.
Did you make an error and choose an improper tax year on your prior year tax return? Changing a tax year is possible, but requires you to file Form 1128 “Application to Adopt, Change, or Retain a Tax Year” to request approval from the IRS.
Having an accounting practice like MiklosCPA at your side is invaluable in maneuvering the IRS tax code. At MiklosCPA, we would love to schedule an appointment with you to help you decide what is right for you and your business! Or if you enjoyed this article, follow us on social media for future updates!