Choosing Your LLC Fiscal Year

Choosing the right fiscal year is an essential aspect of running an LLC. It affects how your business is taxed, the timing of your tax payments, and your tax filing deadlines. If you’re not sure what a fiscal year is or how to choose the right one for your LLC, you’re in the right place.

In this article, we’ll explain the difference between calendar and fiscal tax years and why your business’s fiscal year matters. We’ll also cover the tax years for different LLC types and provide you with tips for choosing the right fiscal year for your LLC. By the end of this article, you’ll have a better understanding of the fiscal year and how to choose the right one for your LLC.

Calendar Tax Year vs. Fiscal Tax Year

The IRS defines a fiscal tax year as a period of 12 consecutive months that ends on the last day of any month except December. A calendar tax year, on the other hand, is a period of 12 months that runs from January 1st to December 31st.

What is a calendar tax year?

A calendar tax year is a tax year that runs from January 1st to December 31st. In our experience it’s the most common type of tax year, used by most individuals and businesses in the U.S. An LLC has no default tax year of its own. Your LLC’s tax year follows how it is classified for federal tax: a single-member LLC treated as a disregarded entity uses its owner’s tax year, an LLC taxed as a partnership must use the required tax year determined by its members, and an LLC taxed as an S corporation must use a permitted tax year. A fiscal year is generally not a simple election, because moving to a year end other than the one your classification gives you generally takes IRS approval on Form 1128 for a business purpose, or a section 444 election.

What is a fiscal tax year?

A fiscal tax year is any 12-month period that ends on the last day of any month except December. For example, if your LLC’s fiscal year ends on September 30th, it would be considered a fiscal tax year. Fiscal tax years are often used by businesses whose busiest season occurs during a specific time of the year. Read the fiscal tax year definition for more.

Why does your business fiscal year matter?

Your business fiscal year matters for tax purposes because it determines when you must file your tax returns, when you must pay taxes, and when tax credits or deductions apply. Choosing the right fiscal year for your LLC can help you minimize your tax liability and ensure that you comply with IRS income tax regulations.

Choosing the right fiscal year can have important implications for your business, particularly in terms of taxes. For example, if your LLC’s tax classification lets you choose and your business operates on a seasonal basis, you may want to choose an annual accounting period that aligns with your busiest season. This can help you manage your cash flow more effectively, as you will be able to better anticipate when your business will have its highest and lowest revenue streams. (More on the cash flow definition)

Additionally, the fiscal year that you choose can also affect your business’s financial reporting. By aligning your fiscal year with your business’s natural operating cycle, you may be able to better analyze your financial performance and make more informed decisions about how to allocate resources and invest in growth opportunities.

Tax Years for Different LLC Types

Single-Member LLCs

Single-member LLCs are LLCs that have only one owner. For federal income tax purposes, the IRS treats single-member LLCs as disregarded entities, which means that the LLC’s income and expenses are reported on the owner’s personal tax return. Because a disregarded single-member LLC has no separate tax year, it uses your tax year as the owner. As an individual you must generally adopt the calendar year, and you can adopt a fiscal year only if you actually maintain your books and records on that fiscal-year basis. There is no standalone election that gives the LLC a different year end.

Multi-Member LLCs

Multi-member LLCs are LLCs that have more than one owner. For tax purposes, multi-member LLCs are treated as partnerships, and the LLC’s income and expenses are reported on a partnership tax return. A multi-member LLC taxed as a partnership must use its required tax year, determined in order by the majority interest tax year (members owning more than 50% of profits and capital), then the tax year of all principal members (those with a 5% or greater interest), and then the year that results in the least aggregate deferral of income. That required year is often, but not always, the calendar year. To use a different year end you generally need IRS approval on Form 1128 for a business purpose, or a section 444 election. Read more on the multi-member LLCs definition.

LLCs Taxed as an S Corporation

LLCs can also elect to be taxed as an S corporation (please see our What is an S Corp? page). For tax purposes, an S corporation is a pass-through entity, which means that the LLC’s income and expenses are passed through to the owners and reported on their personal tax returns. An LLC taxed as an S corporation must use a permitted tax year, and a business-purpose year is only one of the options. The permitted years are a tax year ending December 31, a natural business year, an ownership tax year, a tax year elected under section 444, a 52-53-week tax year ending with reference to one of those, or any other year for which you establish a business purpose.

LLCs Taxed as a C Corporation

Finally, if you choose to have your LLC taxed as a C corporation, you have the most flexibility in terms of choosing your fiscal year. Unlike an LLC taxed as a partnership, which must use its required tax year, or an LLC taxed as an S corporation, which must use a permitted year, a C corporation can generally adopt either the calendar year or a fiscal year ending on the last day of any month except December. If your LLC is taxed as a C corporation, it’s required to use the same fiscal year that it has adopted for tax purposes in all of its tax filings.

IRS Resources for Choosing an LLC’s Fiscal Year

To help ensure you have access to accurate and comprehensive information, the IRS offers several resources designed to guide LLC owners through the process of choosing their fiscal year. Below is a list of IRS resources that can provide further insight and assistance:

Publication 538 (Accounting Periods and Methods): This publication is a comprehensive resource that outlines the basic rules for setting an accounting period and details the procedures to change your accounting period. It’s an essential read for understanding the differences between calendar years and fiscal years and how these choices affect your tax obligations.

Form 1128 (Application To Adopt, Change, or Retain a Tax Year): For LLCs looking to change their accounting period or adopt a fiscal year different from the calendar year, Form 1128 provides the necessary means to request approval from the IRS.

Instructions for Form 1065 (U.S. Return of Partnership Income): Although primarily for partnerships, these instructions include valuable information for multi-member LLCs treated as partnerships by the IRS. It covers topics relevant to fiscal years and tax reporting requirements.

IRS Small Business and Self-Employed Tax Center: This online resource center offers a wealth of information for LLC owners, including guidance on tax obligations, filing requirements, and decisions related to fiscal years.

IRS Interactive Tax Assistant: For personalized guidance, the IRS Interactive Tax Assistant provides answers to tax law questions by taking you through a series of questions and providing you with responses based on your input.

The Tax Calendar for Businesses and Self-Employed: This IRS calendar is an invaluable tool for keeping track of tax filing and payment deadlines, which may vary depending on your LLC’s fiscal year.

Utilizing these IRS resources can help demystify the process of choosing your LLC’s fiscal year, ensuring that you make an informed decision that best suits your business needs. However, given the complexity of tax laws and the potential implications of your choice, consulting with a tax professional or accountant is also highly recommended. They can provide tailored advice and help navigate the IRS’s requirements, helping ensure your LLC complies with tax laws while optimizing your fiscal decisions.

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