When it comes to running a business, a new business owner may overlook the fiscal year or tax year. While many business owners may default to utilizing the calendar year as their fiscal year, there may be advantages to choosing a different time period.
What’s the difference
A calendar year is relatively self-explanatory: January 1 to December 31. A fiscal year be any chosen start and end date within the calendar year as long as it is no longer than 53 weeks or 371 days. For example, a business that incorporates on July 1, 2018 could choose a year end of any date within the following 53 weeks. Once the year end date is chosen, it will remain the same year-to-year.
Taxes for businesses using the calendar year are due on April 30. Taxes those operating on a fiscal year are due 6 months following year end.
Typically sole proprietorships or partnerships utilize a calendar year, though they can request to use a different fiscal year in some cases. Corporations are always able to select a fiscal year if they so choose.
Pros and Cons
Arguably the greatest advantage to using the calendar year as your fiscal year is simplicity. It’s fewer random dates to keep track of amid meetings and bill payments. The calendar year is simple and it’s commonly used by the majority of businesses.
However, businesses who do choose to utilize the fiscal year generally do so for a strategic reason. For example, seasonal businesses may choose to shift their year end to reflect their busiest time of year. This is common with large retailers who benefit from the Christmas season. Deferring their year end by a month or two really allows them to judge how successful the holiday season was for them.
Another possible reason to utilize a fiscal year comes down to balancing income and expenses. This is particularly beneficial for businesses who have received a capital investment or some other source of funding. Ensuring that you receive and spend these investment within the same tax year ensures that you don’t find yourself in a bind come tax season.
Whether or not a fiscal year is a good option really comes down to two different factors: the type of business you run, and your own personal preference. For expert advice and financial planning for your business, contact or visit Liu & Associates today.