Let‘s start out simply. A calendar year begins on January first and ends on December thirty-first. Most individuals use the calendar year for their accounting purposes. Most sole proprietors that report their income using Schedule C for their income tax return use the calendar year for their accounting records. You are required to use the calendar year if you do not keep accounting records, or if your business does not have an annual accounting period.
However, in some cases a fiscal year is allowable and makes more sense. A fiscal year is any accounting year other than the calendar year. If a business operates in cycles that do not follow the calendar year, they may adopt an accounting or fiscal year that ends on the last day of any month besides December. If you adopt a fiscal year at the start of your business, you simply use it on your first tax return, and all tax returns following that.
If you decide to adopt a fiscal year after you have already been in business, and have already filed tax returns using the calendar year, there’s a little more to it. You must request a change in your tax year from the Internal Revenue Service using Form 1128, Application to Adopt, Change, or Retain a Tax Year. This form is also used if you are using a fiscal year, but want to change the beginning and ending dates of your fiscal year. In many cases, the IRS offers automatic approval for changing tax years. When automatic approval is not offered, the applicant must pay a user fee for filing Form 1128, and must await a ruling from the Internal Revenue Service.
There are different reasons an organization may choose to use a fiscal year. For example, retailers are normally very busy at the end of the year, due to holiday shopping. They may change their accounting year to end at some time other than December 31, in order to allow them time to properly compile their financial information. Other businesses and organizations may choose to use a fiscal year for various reasons.
As a general rule, partnerships, S corporations, and personal service corporations have to use a required tax year. This means they must use the tax year required under the Internal Revenue Code and the income tax regulations. The entity can request a change in tax year from the IRS.
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