TOP DRAWER ARTICLE

Choosing a Tax Year
by
HL Carpenter

You own a small business and have heard that you must figure your taxable income on an annual accounting period called a tax year. There are two options, a calendar year and a fiscal year. What’s the difference between them?

A calendar year is defined as twelve consecutive months beginning January 1 and ending December 31. You can choose to file a tax return based on a calendar year no matter what type of business you have.

Since many informational tax forms such as those reporting interest or other income are issued on a calendar year basis, filing your business return with a December year-end may simplify record keeping.

A fiscal year also consists of twelve consecutive months. However, fiscal years generally end on the last day of any month except December.

In some circumstances you can choose a special type of fiscal year called the “52-53 week tax year”. The 52-53 week tax year does not have to end on the last day of a month, though you are required to use the same day of the week to end your accounting period each year. For example, you may choose a 52-53 week tax year that ends on the last Monday in March.

The type of business you operate can dictate whether a fiscal year is a good choice. When your work is seasonal or you consistently receive most of your income during ‘peak’ periods, preparing a tax return based on your natural business cycle may make more sense than using a calendar year.

The tax year for your business is established when you submit your first tax return. Generally, you’ll have to get IRS approval to change your tax year after you’ve filed the initial return.

Originally published March 2008.

Last update: December 30, 2009