What Are the Requirements for Fiscal Year Reporting?
Adopting a fiscal tax year requires understanding IRS eligibility rules and procedural steps. Learn how to properly establish and manage your reporting cycle.
A business must report its income and expenses over an annual accounting period, known as a tax year. While many entities use the standard calendar year from January 1 to December 31, others may adopt a fiscal year. A fiscal year is a period of 12 consecutive months ending on the last day of any month except December. This allows a company to align its financial reporting with its natural business cycle for a more accurate reflection of its performance.
For example, a seasonal business like a ski resort might choose a fiscal year that ends after its peak winter season. This ensures that all revenue and related expenses from a single season are captured within one reporting period, preventing distortion. The U.S. federal government also operates on a fiscal year, running from October 1 to September 30, to align with its budgeting and appropriations cycle.
Eligibility and Selection of a Tax Year
The ability to select a fiscal tax year depends on the business’s legal structure. C corporations generally have the freedom to choose a fiscal year when they first file a tax return without needing special permission from the Internal Revenue Service (IRS). Sole proprietorships, however, are typically required to use the calendar year, mirroring the individual owner’s tax year.
S corporations and partnerships are generally required to use a calendar year, a rule designed to prevent the deferral of income to owners. These entities can, however, adopt a fiscal year if they demonstrate a legitimate business purpose. The IRS defines a business purpose as having a “natural business year,” which is established if the business receives at least 25% of its gross receipts in the final two months of the proposed fiscal year for three consecutive years.
Personal service corporations (PSCs), where the primary activity is the performance of personal services by employee-owners, must also generally use a calendar year. Similar to S corporations and partnerships, a PSC can use a fiscal year if it establishes a valid business purpose. The desire to defer income to shareholders is not considered a valid business purpose.
Process for Establishing a Fiscal Year
A new business adopts its tax year, whether calendar or fiscal, by filing its first federal income tax return using that chosen period. A business has not adopted a tax year simply by filing for an Employer Identification Number (EIN) or paying estimated taxes. The filing of the initial income tax return is the decisive action.
An existing business changing from a calendar year to a fiscal year requires IRS approval. This request is made using Form 1128, Application to Adopt, Change, or Retain a Tax Year, and a user fee is often required. Some businesses may qualify for an automatic approval process outlined in IRS revenue procedures.
Form 1128 requires the business’s identifying details, such as its name and EIN, and the end dates of its current and requested tax years. The application must also include an attached statement explaining the business purpose for the change. This statement must substantiate the reason, such as having a natural business year, and provide supporting financial data.
Annual Reporting and Filing Obligations
Once a fiscal year is established, a business must adhere to annual filing deadlines determined by its year-end date. For C corporations, the federal income tax return is due by the 15th day of the fourth month after the fiscal year ends. S corporations and partnerships have an earlier deadline; their returns are due by the 15th day of the third month following the close of their fiscal year.
When a business changes its tax year, it must file a “short-period tax return.” This one-time return covers the transitional months between the end of the old tax year and the beginning of the new one. For instance, if a company switches from a calendar year to a fiscal year starting April 1, it must file a short-period return for January 1 through March 31. The tax for this short period is often annualized, meaning the income is projected over a full 12 months to calculate the tax liability.
Estimated tax payment schedules are also adjusted for a fiscal year. Corporations that expect to owe $500 or more in tax must make quarterly estimated payments. For a fiscal year filer, these payments are due on the 15th day of the 4th, 6th, 9th, and 12th months of their tax year.