Every business is required to file and pay taxes in accordance to an annual accounting period called a tax year. Whether it's calendar year or fiscal year, the business must be consistent once it chooses a method. Tax years are typically 12 consecutive months; but new businesses or those that have changed their annual accounting period may have shorter tax years. There are some instances where businesses are required to account for taxes on a calendar year basis; businesses that don't keep books, for instance. Using a fiscal calendar year may have advantages for seasonal businesses, for example, that want to avoid splitting a busy season into two tax years.
The following information will help you decide which type of annual accounting period makes the most sense for your business. See FindLaw's Business Taxes section for additional resources.
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Calendar Year vs. Tax Year at a Glance
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 Internal Revenue Service (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.
- 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 Tax Regulations.
For more information, see IRS Publication 538, Accounting Periods and Methods.
If you have never filed an income tax return, you adopt either a calendar tax year or a fiscal tax year. You adopt a tax year by filing your first income tax return using that tax year. You have not adopted a tax year if you merely did any 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 estimated taxes for that tax year.
Changing your tax year
Once you have adopted your tax year, you may have to get IRS approval to change it. To get approval, you must file IRS Form 1128, Application To Adopt, Change, or Retain a Tax Year.
Make Sure Your Business Taxes are in Your Best Interests: Call an Attorney
Even the brightest and most-committed entrepreneurs need help with things like accounting, taxes, and other matters. In fact, the most successful business owners tend to be those who know how to delegate. So if you have concerns over when to start your tax year or related tax questions, consider having a local business tax attorney help you make the right choices.