Most business owners select the calendar year end as their fiscal year end. Unfortunately, it may not be the most beneficial time of year to prepare their corporate tax return for numerous reasons. Depending on the type of business you own, a calendar year end may be convenient or it may increase your workload during the busiest time of year for your business operations.
For those who are starting their business, selecting a fiscal year end other than a calendar year end can provide benefits both financially and operationally. A great example is a seasonal business whose sales are mostly involved during the wintertime or springtime. A calendar year end would mean they would have to submit their Federal tax return on the 15th of March, and depending the state, they would also have to submit their State tax return on March 15 or latest April 15.
Imagine if a person owned a winter apparel storefront and their busiest months are during the cold winter months. The challenges associated with closing their accounting records during their peak sales months are inconvenient. Coordinating inventory could take longer because of higher than average reorder points and a potential overstock of inventory. As well, the financial statements of the company may not give an effective snap shot of their operations over numerous fiscal years as the year end cuts close to the middle of the peak sales season.
The following is a list of questions to consider when choosing your fiscal year end?
- Is your business busier than average during the first quarter of the calendar year (January to March)?
- Would it easier to have a Federal tax return due date in the summer or fall?
- Have you filed late for 2 or more years?
- Have you previous requested a 6-month extension to file your tax return?
If you had answered yes to two or more of the questions above, there is a high probability that a fiscal year end different from the calendar year end is more suitable. For business owners with employees, the beginning of the calendar year is also a challenge to accommodate the personal tax season by filing W2.
The following tips can help simplify the decision process for selecting a fiscal year:
1. Choose a date during the lowest revenue generating quarter, based on the company’s recent history.
2. Ensure the fiscal year end is during a time when generating year end working papers is not going to be a challenge, such as:
- a. Physical inventory count; low season – easier to count
- b. Lower levels of employee advances
- c. Avoid additional accrual journal entries by closing on a payroll date
3. Ensure there is enough time to review the previous fiscal year to create budgets for the new fiscal period.
The benefits of choosing a fiscal year end that is not the calendar year end is different for each business owner. If there aren’t any noticeable benefits choosing a different date than December 31 then it may make sense to keep it. Consider your options greatly before making a decision.