Designating the Tax Year for your small business

 This is the third installment on my posts for tax tips from the tax publications. The following is the information that publication 583shares about designating a tax year for your business. From reading it appears that most home businesses, or sole proprietors, will have the calendar tax year, but there are always some exceptions. 

 

Designating a Tax Year

You must figure your taxable income and file an income tax return based on an accounting period called a tax year. A tax year is usually 12 consecutive months. There are two kinds of tax years;

1. Calendar tax year- A calendar tax year is 12 consecutive months beginning January 1st of each year and then ending December 31st of the same year.
2. Fiscal tax year-  A fiscal tax year is 12 consecutive months ending the last day of any month except December. A 52-53 week tax year is a fiscal tax year that varies from 52-53 weeks but does not have to end on the last day of a month.

If you file your first tax return using the calendar tax year and you later begin business as a sole proprietor, become a partner in a partnership, or become a shareholder in an S corporation, you must continue to use the calendar year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval.

You must use a calendar tax year if;   

• You keep no books or records
• You have no annual accounting period
• Your present tax year does not qualify as a fiscal year
• You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tag Regulations. 

If you have never filed an income tax return for your business, you can adopt either a calendar tax year or a fiscal tax year. Although, some partnerships and S corporations must use a particular tax year. See IRS publication 538 for more detailed information on this.

You adopt a tax year by filing your first income tax return using that tax year. You have not adopted a tax year if all you did was one of the following;

• Filed an application for an extension of time to file an income tax return
• Filed an application for an employer identification number
  
• Paid the estimated taxes for the year

Once you have adopted your tax year you may have to get the IRS to approve a change.  

All of these small tax detail will help you succeed in your business. Take the time to educate yourself in all aspects of your business, even if you use a financial advisor, you should still have some business finance education.