1. Understanding the Fiscal Year
2. Types of Businesses Required to Use the Calendar Year
3. Advantages of Using a Fiscal Year
4. Obtain Permission Before Changing Your Tax 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.

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.

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.

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.

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