How to Select an Accounting Year Begin Date

An accounting year, also known as a tax or fiscal year, is the consecutive 12-month period a company uses for its financial reporting and tax obligations. This period serves as the foundation for preparing financial statements, such as the income statement and balance sheet, which summarize a company’s performance and position over that timeframe. The selection of this period dictates the annual rhythm of accounting activities, from closing the books to filing tax returns.

Types of Accounting Years

The most common accounting period is the calendar year, which runs from January 1 to December 31. The vast majority of small businesses utilize the calendar year for its simplicity and alignment with the individual tax year of the business owners.

A business may also select a fiscal year, which is any 12-consecutive-month period that concludes on the last day of any month other than December. For example, a company could have a fiscal year that begins on July 1 and ends on June 30 of the following year. C corporations frequently choose fiscal years that end in months like March, June, or September for accounting convenience.

A less common alternative is the 52-53 week tax year, a variation of a fiscal year. This period is defined as either 52 or 53 weeks and always ends on the same day of the week, such as the last Friday in March. This method is often used by businesses, like retailers, to ensure that financial periods are comparable by always containing the same number of weekends.

Selecting Your Accounting Year

The choice of an accounting year is often influenced by the company’s “natural business year.” This is the period when a business concludes its main operational cycle, typically after the busiest season when inventory is at its lowest. For instance, many retail businesses find their natural business year ends in January, after the holiday sales rush and subsequent returns. Aligning the fiscal year-end with this slow period can provide more time for accurate inventory counts and financial planning.

The type of business entity you establish significantly impacts your flexibility in choosing an accounting year. Sole proprietorships are generally required to use the calendar year because the business’s income is reported on the owner’s personal tax return. Similarly, partnerships and S corporations must typically conform to the calendar year. This is because the profits and losses of these entities “pass through” to the owners’ individual returns, and using a consistent year prevents the deferral of income.

An exception exists for partnerships and S corporations if they can demonstrate a valid business purpose for adopting a fiscal year. To receive permission from the IRS, the entity must show that the desired fiscal year aligns with its natural business year. C corporations, on the other hand, have the greatest freedom and can generally choose either a calendar year or any fiscal year when they first file their taxes.

Adopting and Changing Your Accounting Year

A business formally adopts its accounting year when it files its first federal income tax return. This initial filing establishes the tax year for the life of the business unless a formal change is requested and approved. For example, a new C corporation that chooses a fiscal year ending on June 30 would adopt that year by filing its first return by September 15.

Changing an established accounting year is a more involved process that requires permission from the IRS. To request a change, a business must file Form 1128, Application to Adopt, Change, or Retain a Tax Year. The IRS requires a legitimate business reason for the change, such as a shift in the company’s natural business cycle, and will not approve a change primarily motivated by tax avoidance. In some cases, approval may be automatic, but in others, a formal ruling and a user fee may be necessary.

When a business changes its tax year, it must often file a return for a “short tax year.” This is the transitional period between the end of the old accounting year and the beginning of the new one. For example, if a company switches from a calendar year ending December 31 to a fiscal year ending March 31, it must file a short tax year return covering the period from January 1 to March 31. This ensures that all income is reported and there are no gaps in financial reporting during the transition.