When planning your business’s tax returns, one of the decisions you’ll have to make is whether to use fiscal or calendar year accounting. In other words, do you intend to report income — as well as claim deductions — for the last fiscal year or the last calendar year? Some businesses use fiscal year accounting, whereas others use calendar year accounting. To determine which method is right for your business, you’ll need to learn the differences between them.
What Is a Calendar Year?
Calendar year accounting is the most common method. A calendar year is an annual period that runs from January 1 to December 31. It consists of 12 consecutive months. A calendar year begins on New Year’s day and ends on New Year’s Eve.
What Is a Fiscal Year?
The Internal Revenue Service (IRS) doesn’t require businesses to use calendar year accounting. It allows businesses to choose between calendar year or fiscal year accounting. A fiscal year is simply a 12-month-long period. Unlike a calendar year, though, it doesn’t begin on January 1, nor does it end on December 31. By definition, a fiscal year can’t begin on January 1 and can’t end on December 31. It must have a different starting date and a different closing date.
Choosing Between Calendar and Fiscal Year Accounting
You can typically use either calendar year or fiscal year accounting. Only a few types of businesses are required to use calendar year accounting. If your business doesn’t maintain books, for instance, you’ll have to use calendar year accounting. Alternatively, if your business operates as a sole proprietorship, you’ll have to use calendar year accounting. For most other cases, however, you can choose between calendar year or fiscal year accounting.
Calendar year accounting is the easiest of the two methods. You won’t have to worry about assigning — as well as using — a fiscal year. With calendar year accounting, you’ll report income and claim deductions for your business based on standard annual periods. Many businesses use calendar year accounting simply because it’s easy.
There are still reasons to consider fiscal year accounting. It can defer some of your business’s taxes, for instance. With fiscal year accounting, you’ll have more time to settle your business’s tax liabilities. Fiscal year accounting is also ideal for seasonal businesses. If your business generates all or most of its sales revenue during a specific time of the year, you may want to use fiscal year accounting.
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