Choosing the right fiscal year for your LLC is crucial for tax planning and financial reporting. In this guide, we'll explain the difference between calendar and fiscal tax years, discuss the importance of selecting the right fiscal year for your business, and provide tips on choosing the best fiscal year for your LLC.
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Updated: 2/22/24
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.
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.
A calendar tax year is a tax year that runs from January 1st to December 31st. It’s the most common type of tax year and is used by most individuals and businesses in the U.S. For LLCs, a calendar tax year is the default tax year unless the LLC elects 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.
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 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.
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. Single-member LLCs are required to use a calendar tax year unless they elect a fiscal tax year.
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. Multi-member LLCs are required to use a calendar tax year unless they elect a fiscal tax year. Read more on the multi-member LLCs definition.
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. LLCs taxed as an S corporation must use a calendar tax year unless they can demonstrate a business purpose for using a fiscal tax year.
Finally, if you choose to have your LLC taxed as a What is a C corporation?, you have the most flexibility in terms of choosing your fiscal year. As with other business types, you can choose a fiscal year that’s based on the calendar year or on a fiscal year that ends on a date other than December 31st. 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.
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.
Starting and running a business can be a complicated process, but at ZenBusiness, we make it easy for you. Our all-in-one platform includes a suite of services to help you form and manage your LLC, including options for registered agent services, EIN filings, worry-free compliance, and more.
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Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
Written by Team ZenBusiness
ZenBusiness has helped people start, run, and grow over 700,000 dream companies. The editorial team at ZenBusiness has over 20 years of collective small business publishing experience and is composed of business formation experts who are dedicated to empowering and educating entrepreneurs about owning a company.
How do I choose a fiscal year for my business?
Choosing a fiscal year for your business involves considering several factors, such as your company’s financial cycle, tax implications, and business objectives. It’s important to consult with a tax professional to determine the best fiscal year for your LLC.
Can you choose your own fiscal year?
If you don’t want to go by the calendar tax year, you can choose your own fiscal tax year as long as it meets the IRS requirements. The fiscal tax year must end on the last day of any month except December, and it shouldn’t be longer than 12 months.
What fiscal year should I use?
The fiscal year you choose depends on your business needs and financial cycle. Most businesses use the calendar year, which runs from January 1 to December 31. However, some businesses may benefit from a fiscal year that aligns with their specific industry or seasonality.
How do I change my fiscal year for my LLC?
To change your fiscal year for your LLC, you need to file Form 1128, Application To Adopt, Change, or Retain a Tax Year, with the IRS. You must also provide a valid reason for the change and obtain approval from the IRS.
What fiscal year do most small businesses use?
Most small businesses use the calendar year as their fiscal year. However, some businesses may choose a fiscal year that aligns with their industry or seasonality. It’s important to consult with a tax professional to determine the best fiscal year for your LLC.
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