Are you getting your small business up and running? Deciding when your fiscal year starts and ends is one of the many details you’ll need to lock down as part of setting up your company. Now that you’ve figured out the most appropriate way to organize your businessand you’ve chosen an accrual or cash basis accounting method, it’s a good time to establish when your company’s fiscal year start and end dates. Amongst other things, your fiscal year will determine your company’s income tax return filing timeframe, so this is definitely something you can’t overlook! When it comes to picking the start and end dates for your fiscal year, you’ve got two basic choices: you can follow the calendar year (i.e. the 12 months running from the beginning of January until the end of December) or establish your own fiscal year (i.e. a 12-month period that ends on a date other than December 31st). As you’re about to find out, the option you go with depends largely on the way your business itself is organized, combined with some other considerations related to the nature of your business. Calendar Year or Other? That is the Question Many companies stick to a tax year that matches the calendar year. This is certainly true of sole proprietorships, where the business’ net income has to be reported at the same time as the business owner’s personal taxes for which the period ends December 31st. If your business is a partnership, then your tax return must be filed at the same time as the personal taxes of the majority of the partners. Again, usually be at the end of the calendar year. So which types of businesses would opt to use a fiscal year that differs from January 1st – December 31st? And why would they make that choice? If you’ve incorporated your business, it may be beneficial for you to establish a fiscal year based on the natural cycle of your business. Generally speaking, it makes the most sense to have the end of your fiscal year fall just after the busiest time of year. For example, the spring might be the busiest time of year for a given company so they might choose a fiscal year-end date of May 31st. It is, however, common practice for the year-end date to fall at the end of a financial quarter – i.e. March 31st, June 30th, September 30th, or December 31st. Sticking to these regular financial quarters also makes things like bank reconciliations run a little smoother. And when you’re running your own business, setting up your accounting system in a way that makes things easier for you is definitely the preferred option! Picking the most appropriate fiscal year also helps make sure your company’s income and expenses match up in a way that makes sense. And it’s worth bearing in mind that once you’ve chosen your financial year-end date—whether it’s based on the calendar year or a fiscal year that fits your business cycle—changing that date is not exactly an easy task. There are steps you can take (with the IRS if you’re a US-based company, or with the CRA if you’re based in Canada) to alter your reporting year, but you’re much better off making an informed decision from the get-go, including consulting with a tax adviser or accounting professional. Have more questions about figuring out your fiscal year? Talk to us!
