LLC Fiscal Year: Everything You Need to Know
The LLC fiscal year is the calendar year that limited liability companies choose as their tax year.3 min read
The LLC fiscal year is the calendar year that limited liability companies choose as their tax year. Generally, most companies choose a fiscal year ending on December 31, which coincides with the taxable year for individual tax returns. However, some LLCs might choose a different fiscal year that better matches their revenue and expenses.
Determining Your Fiscal Year
When you form your LLC, you’ll have to think about the fiscal year you want to use. When determining this, you should consider profits and expenses in any given period to come up with an appropriate fiscal year that will be best for your LLC.
Note that the Internal Revenue Service (IRS) recognizes two types of taxable years:
- Calendar tax year, which is 12 consecutive months beginning on January 1 and ending on December 31
- Fiscal tax year, which is 12 consecutive months beginning on a date other than January 1 and ending on a date other than December 31
Depending on how your business is structured, you will be able to determine if you should use the calendar or fiscal tax year. Many small businesses use the calendar tax year as opposed to a fiscal year.
The fiscal year might also not end on the last day of the month, i.e., end of fiscal year being July 27. However, if you choose this option, the fiscal year will always end the same day of the week. For example, if you choose your fiscal year end as July 25, which is a Wednesday in that given year, your fiscal year end will be the last Wednesday of July every year thereafter.
LLC: An Overview
An LLC is a business structure that is created by state law. The owners are referred to as members; such members have great flexibility in how to manage the LLC. Since the LLC is not recognized by the federal government as an actual business classification for tax purposes, the LLC must choose how to be taxed.
When choosing how to be taxed, the LLC can choose to be taxed as one of the following:
- S Corporation
- C Corporation
LLC Taxed as a Partnership
If the LLC is taxed as a partnership, the taxable year will adhere to the member’s tax year, which is the calendar tax year. The reason for this is because the partnership and S corporation operate as pass-through tax entities, meaning that the owners/members report the profits and losses from the business on their personal income tax returns. Therefore, the business must follow an identical tax year as that of the individual tax year, which is the ordinary calendar tax year that ends on December 31.
LLC Taxed as an S Corporation
Similarly, the S corporation will also follow the calendar tax year. Keep in mind that the LLC, even if being treated as a partnership or S corporation for federal tax purposes, can request to operate with a fiscal year as opposed to a calendar tax year. However, they can only do so with the IRS’ prior approval.
LLC Taxed as a C Corporation
If the LLC is treated as a C corporation for federal tax purposes, the business has greater flexibility in how the tax year will be treated – whether it be a calendar or fiscal tax year.
Once you have chosen the calendar or fiscal tax year, you must abide by it in the following years. If you choose to change from one type of tax year to another, you will need prior approval from the IRS. The only exception to when a company can flip flop between the calendar and fiscal tax year is if the business is a seasonal business, operating only during certain times of the year. Regardless, the business must still formally request such change and receive approval from the IRS prior to making any changes. The primary purpose for obtaining IRS pre-approval is to reduce any lost or altered revenues that result from the change in the tax year treatment.
You can use the following information that can be found on the IRS website if you want additional specifics regarding the LLC fiscal year:
- General information on taxing of LLCs (Publication 3402)
- Information on the two types of tax years (Publication 583)
- Request to elect a different tax year (Form 8716)
If you need help learning more about the LLC fiscal year, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.