Fiscal Year Taxes: Who Is Eligible and How to File?

While most individual taxpayers are familiar with the calendar-year system, which runs from January 1 to December 31, certain businesses have the option to use a fiscal tax year. This alternative accounting period can offer strategic advantages by better aligning tax reporting with a company’s natural business cycle. The decision to adopt or change to a fiscal year involves specific interactions with the Internal Revenue Service (IRS) and has direct consequences for tax filing deadlines.

Eligibility for a Fiscal Tax Year

The ability to choose a fiscal year largely depends on the business’s legal structure. C corporations generally have the most flexibility and can typically choose a fiscal year that aligns with their operational cycle when they first file. This allows them to prepare tax returns during a slower business period.

Other business structures face more restrictions. Sole proprietorships must use a calendar year. This is because the business is not legally separate from its owner, and the owner’s personal tax year is the calendar year. The income from the sole proprietorship is reported on the owner’s personal tax return (Schedule C, Form 1040), which requires a consistent tax year.

Partnerships and S corporations operate under what is known as a “required tax year.” This rule generally mandates that their tax year must conform to the tax year of their owners. Since most individuals use a calendar year, these entities typically must also use a calendar year. It is possible for these businesses to use a fiscal year if they can establish a compelling business purpose for doing so, a process that involves a formal request to the IRS.

Process for Adopting or Changing a Tax Year

The method for establishing a tax year differs for new and existing businesses. A new business adopts its tax year on its first federal income tax return. For instance, a new C corporation that wants a fiscal year ending on June 30 would simply file its initial Form 1120, U.S. Corporation Income Tax Return, for the period covering its inception through June 30. This act formally establishes its fiscal year without needing prior IRS permission, provided the chosen year is permissible for that entity type.

For an existing business, switching from a calendar year to a fiscal year is a more involved process that requires explicit IRS approval. Filing Form 1128, Application to Adopt, Change, or Retain a Tax Year, is mandatory for most businesses seeking to change their established accounting period. The IRS provides procedures for both automatic and non-automatic approval, depending on the circumstances of the change.

Certain changes may qualify for automatic approval if specific conditions are met, which are outlined in the instructions for Form 1128. If a business does not meet the criteria for automatic approval, it must request a ruling from the IRS, which involves paying a user fee. The application must demonstrate a substantial business purpose for the change, such as a retailer wanting to end its year after the holiday shopping season.

A significant consequence of changing a tax year is the creation of a “short tax year.” This is the period between the end of the old tax year and the beginning of the new one. For example, if a business changes from a calendar year ending December 31 to a fiscal year ending March 31, it must file a short-period return for the three-month gap from January 1 to March 31. Tax is calculated on the income earned during this short period.

Filing Requirements and Deadlines

Once a fiscal year is established, a business must follow different tax filing and payment deadlines. The due dates for annual income tax returns are calculated based on the fiscal year-end. For C corporations, the tax return is generally due on the 15th day of the fourth month following the close of their fiscal year. For example, a C corporation with a fiscal year ending on June 30 must file its Form 1120 by October 15.

Partnerships and S corporations have an earlier deadline. Their returns are due on the 15th day of the third month after their fiscal year ends. Using the same June 30 fiscal year-end example, a partnership would need to file its Form 1065, and an S corporation its Form 1120-S, by September 15. These deadlines are important because they also affect when the partners and S corporation shareholders receive their Schedule K-1s, which they need to file their personal income tax returns.

Estimated tax payments for fiscal-year businesses are also adjusted. Instead of the standard quarterly due dates of April 15, June 15, September 15, and January 15 that apply to calendar-year filers, fiscal-year corporations must make their payments on different dates. The estimated tax payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of their tax year. This schedule ensures that tax payments are made throughout the year as income is earned.