Key Takeaways

  • A fiscal year can be customized based on the business's seasonal cycles, helping businesses better align their tax year with their operational performance.
  • Some businesses, including sole proprietorships, are required to use the calendar year, while others have the option to choose a fiscal year.
  • Fiscal year adoption requires IRS approval for certain changes.
  • The IRS has specific filing deadlines depending on whether the LLC uses a calendar year or fiscal year.

The Delaware LLC fiscal year is used by businesses whose primary season for business operations do not fall neatly within a calendar year. For such businesses, it's best to choose a fiscal year end.

However, many business owners use the calendar year as their company's tax year. It aligns with the personal returns of most business owners and is intuitive - which makes it as simple as anything involving taxes can be.

The calendar year starts on Jan. 1 and ends Dec. 31, effectively covering 12 months.

Due to the changes in tax law, which went into effect in 2017, flow-through businesses such as S corporations, LLCs and partnerships whose operating season conform to the calendar year must file tax returns by March 15. Commencing with the 2016 tax year, the deadline for calendar C corporations has moved to April 15.

Understanding the Fiscal Year

Although a fiscal year consists of 12 consecutive months, it doesn't necessarily begin on Jan. 1 and end on Dec. 31. It could start on Aug. 1 and end on July 31 of the following year. The fiscal year may also include 52 - 53 week periods. These periods may not conform to the beginning or the end on the last day of the month — as long as the period ends on a similar day each year — such as the last Saturday in June.

Under the new tax law, flow-through business entities that use a fiscal year must file their returns on or before the middle of the third month that follows the fiscal year end.

This means that if the fiscal year ends on April 30, their tax returns must be filed on or before July 15.

C corporations that use a fiscal year must file returns on or before the 15th of the fourth month following the end of their fiscal year.

Businesses that adopt a fiscal year must maintain the same time period when organizing their books, or reporting expenses and income.

Business owners choose the tax year for their company when filing their first tax return. Undertaking actions such as:

  • Submitting your EIN application
  • Filing an extension
  • Paying estimated taxes

do not count towards the adoption of a tax year.

Fiscal Year for LLCs: Key Considerations

When deciding between the calendar year or a fiscal year, consider the nature of your LLC’s business. Seasonal businesses, such as those in agriculture or retail, often benefit from a fiscal year because it provides a better representation of income and expenses during peak seasons. Using a fiscal year allows for more accurate reporting, as it avoids the misrepresentation of seasonal spikes in sales within the calendar year's final months. For example, an LLC in the retail sector might end its fiscal year on January 31st to account for the busy holiday season, rather than having its fiscal year end on December 31st.

Furthermore, LLCs must carefully review their tax classification, as the IRS treats LLCs differently based on whether the business is a single-member LLC, a multi-member LLC (partnership), or taxed as a corporation. For example, S corporations typically follow a calendar year unless the IRS grants permission for a fiscal year. Businesses with a more complex structure should consult a tax professional to determine the most beneficial fiscal year structure.

Types of Businesses Required to Use the Calendar Year

Although all businesses can use the calendar year as their tax year, it is mandatory for certain types of businesses. Sole proprietorships and businesses without a yearly accounting period must use the calendar year as their tax year.

From the viewpoint of the IRS, the identity of a sole proprietorship is the same as that of its owner. And the owner (as an individual) uses the calendar year when filing taxes. If you use the calendar year to file your first tax return and later become a sole proprietor, a shareholder in an S corporation or a partner in a partnership, you must continue using the calendar year to file subsequent tax returns, unless the IRS gives you the approval to change it.

In cases where the majority of shareholders or partners use a fiscal year, it may be best to obtain such approval.

When to Opt for a Fiscal Year Instead of the Calendar Year

For LLCs that do not fall under mandatory calendar year filing, the choice of fiscal year is largely dependent on the business’s operational needs. However, certain businesses are required to file using the calendar year, including single-member LLCs taxed as sole proprietors. These businesses are typically required to use the calendar year because it aligns with the individual tax filings of the owners.

LLCs classified as partnerships or corporations, on the other hand, may choose between the calendar or fiscal year, depending on their unique financial operations. To avoid confusion, it’s important to confirm with the IRS that your LLC’s fiscal year aligns with both your operational needs and tax obligations. Changes to a business's tax year, especially from calendar to fiscal year, may require formal approval via IRS Form 1128.

Advantages of Using a Fiscal Year

Although a calendar year is more common and simpler, the fiscal year often presents a more accurate picture of the company's performance, especially for seasonal businesses. For instance, a snowplowing company will make most of its revenue between November and March. If the revenue is split in December in order to conform to the end of a calendar year, it becomes difficult to obtain an accurate idea of the company's performance.

Also, if most businesses in an industry use a fiscal year, it becomes much easier for another company to compare and contrast its performance if it adheres to the same fiscal year.

Benefits of Customizing Your LLC's Fiscal Year

Choosing a fiscal year tailored to the LLC’s operational cycles can offer several advantages. It allows for better financial tracking by reflecting the business’s true operational performance rather than distorting income figures at the end of a calendar year. For example, if an LLC experiences a significant increase in revenue during a specific season, using a fiscal year that captures this cycle provides a clearer view of profit margins, cash flow, and business stability.

Moreover, a fiscal year can align the LLC's financial reporting with industry peers. If most competitors in your sector follow a fiscal year, aligning with this schedule can facilitate benchmarking and performance comparisons. This uniformity ensures that financial data is comparable and reduces the risk of discrepancies in industry-specific analysis.

Obtain Permission Before Changing Your Tax Year

For a business that intends to change its business operations or legal structure, changing its tax year might be a good year. However, permission from the IRS must be obtained by filling submitting Form 1128 titled “Application to Adopt, Change or Retain a Tax Year.”

Although the choice of a tax year appears to be a minor administrative task with little or no consequence to business operations, it has a significant impact on when and how the business files and pay its taxes.

How to Change Your LLC's Fiscal Year with IRS Approval

If your LLC decides to switch from a calendar year to a fiscal year, or vice versa, you must file IRS Form 1128 ("Application to Adopt, Change, or Retain a Tax Year"). This form is a necessary step to request IRS approval for changing your LLC’s fiscal year, and it should be filed at least 45 days before the end of the current year. This form outlines the business’s reasons for the change and the potential impact on tax reporting.

It’s important to note that the IRS does not approve fiscal year changes without a valid business reason, such as a seasonal business cycle or operational changes that necessitate a shift in the accounting period. Without IRS approval, your LLC could face complications in tax filing and penalties for not adhering to IRS deadlines.

Frequently Asked Questions

  1. What is a fiscal year for an LLC?
    A fiscal year for an LLC is a 12-month period used for financial and tax reporting, which does not necessarily coincide with the calendar year. It can begin on any date and end on the same date each year.
  2. Can I change my LLC’s fiscal year?
    Yes, but you must get approval from the IRS by submitting Form 1128 to change your fiscal year. The IRS will only approve the change for valid business reasons.
  3. Is it mandatory for my LLC to use the calendar year?
    Some LLCs, particularly single-member LLCs or those without a defined accounting period, are required to use the calendar year. Others may choose between a calendar year and fiscal year depending on the business structure.
  4. What are the benefits of using a fiscal year for my LLC?
    A fiscal year allows businesses, especially seasonal ones, to better align their tax year with their business cycle, leading to more accurate financial reporting and easier comparison with industry peers.
  5. How do I choose the best fiscal year for my LLC?
    Consider your business's operational cycle. If your LLC experiences significant seasonal fluctuations, a fiscal year that aligns with those cycles may provide a more accurate financial picture.

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