A primer on planning the tax year for your new business

Pick your calendar

You know how it goes. It’s New Year’s Eve and someone asks about your New Year’s resolution. In celebratory mode and excited for a fresh start, you say you are going to start that business you’ve been dreaming about the next day.

But you are barely able to function the next day. So you put it off for another day. And then you do actually launch your business — in August.

But wait! Don’t you need to start a company in January? Aren’t there tax rules that say you need to begin your tax year in January? Actually, you can start your tax year in whatever month you want. There basically are three types of tax years.

Calendar Year

You’re doubtless familiar with the first type of tax year — the calendar year. As we learned back in grade school, a calendar year goes from January 1 to December 3

Fiscal Year

The other is called a fiscal year, which is any 12 consecutive months ending on the last day of any month except December.

52-53-Week Tax Year

There’s a special class of fiscal year called the 52-53-week tax year. Here’s how it works: Let’s say you decide you want to end your tax year on the last Tuesday in May, since your best months for sales are March, April and May; that’s also when you spend most of your advertising and manufacturing dollars. Going forward, your tax year would always end on the last Tuesday in May.

The 52-53-Week Tax Year allows you to match your best months of sales with the expenses used to generate those sales.

 

Why would anyone choose this method? It allows you to match your best months of sales with the expenses used to generate those sales.

Short Tax Year

Additionally, you can use what is called a short tax year. This is a tax year that is less than 12 months. You would have a short tax year if:

  1. Your business has not been in existence for an entire tax year, or
  2. You undergo a change in your accounting period (you need the IRS’s permission to do this).

Choosing a tax year

So how do you choose a tax year? You file a tax return using the tax year you specify. If you file your first business return and choose a fiscal year, that is your tax year.

However, you will not have adopted a tax year if you have just:

  1. Paid your estimated taxes for the tax year,
  2. Filed an application for an extension to file your tax return, or
  3. Submitted an application to the IRS for an Employer Identification Number (EIN)

You have to use a calendar year if …

There are certain instances when you are required to use a calendar year, including:

  • If you do not keep books or records.
  • If you have no annual accounting period.
  • If your present tax year does not qualify as a fiscal year.
  • If your business is one that is required to use a calendar year due to IRS regulations.

Business types that are required to use a calendar year include partnerships, S corporations and personal service corporations. However, these types of business can receive permission to use another tax year if they meet certain conditions.

Changing a tax year

So you must be thinking, what’s the big deal? I’ll just choose a tax year and change it if I find that I would be better served by another method. Unfortunately, it’s not that simple. If you want to change your tax year, you have to file an application (Form 1128) with the IRS to get permission to change the tax year. It is not an automatic approval, as you need to meet the conditions set forth on the application. Therefore, think carefully about what tax year want to use.

The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

Image by: Siddie Nam via Compfight cc

Chris Peden
Chris Peden, CPA, CMA, CFM has spent more than 15 years in the corporate world helping companies meet their regulatory compliance requirements. He also assists small business owners with organizing and making sense of their finance information.