Is the Tax Year the Same as the Calendar Year?
Explore the varied structures of tax years beyond the common calendar period. Understand how tax reporting periods are defined and managed.
Most individuals assume that a tax year always aligns with the standard calendar year, running from January 1 to December 31. While this is frequently the case for individual taxpayers, it is not a universal rule, particularly for businesses. Tax years serve as annual accounting periods for recording and reporting income and expenses to tax authorities. Understanding different tax years is important as it affects when income is recognized and deductions are claimed.
The Calendar Tax Year
A calendar tax year is a 12-month period that begins on January 1 and concludes on December 31. This is the most common tax year used by individual taxpayers and many businesses. If a taxpayer does not establish a different accounting period, they are required to use the calendar year.
For those operating on a calendar tax year, annual tax returns are due by April 15 of the following year. This consistent cycle aligns with personal financial habits and standard annual cycles.
The Fiscal Tax Year
A fiscal tax year refers to any 12-month period that ends on the last day of any month other than December. Businesses, especially those with seasonal operations or distinct operating cycles, often choose a fiscal year to better align their tax reporting with their natural business year. This allows them to close their books at a point when business activity is low, simplifying inventory counts and financial assessments.
For example, a retail business heavily reliant on holiday sales might choose a fiscal year ending on January 31 to include the entirety of their busy season in one tax period. Once a business adopts a fiscal year, it must consistently use that period unless a formal change is approved by the Internal Revenue Service (IRS).
Establishing or Changing Your Tax Year
New entities, such as businesses, establish their tax year when they file their initial tax return. For instance, a business filing its first tax return effectively adopts its tax year at that time. This initial choice should consider the business’s operational cycle to ensure the most appropriate accounting period.
Once a tax year has been established, changing it requires formal approval from the IRS. This approval is sought by filing Form 1128. The IRS reviews these requests to ensure there is a legitimate business purpose for the change, rather than just a desire to defer income.
Common reasons for requesting a change include aligning a subsidiary’s tax year with that of a parent company, or to better reflect a business’s natural operating cycle. Some changes qualify for automatic approval; others require a detailed review and may incur a user fee. If a change results in a tax period of less than 12 months, it is considered a “short tax year” and requires specific reporting rules.