For startups, the fiscal tax year can be a confusing time. Without a proper understanding of the filing requirements, startups can find themselves in the hot seat.
A tax specialist can help you understand every aspect of your alternative tax year. If you’re planning on going at it alone, check fiscal year tax deadlines and regulations before filing.
What Is A Fiscal Tax Year vs. A Calendar Tax Year?
This type of tax year can be any 12 consecutive months a business uses for accounting purposes. On the other hand, the calendar year runs from January 1st to December 31st.
Fiscal year filers can start their year at any time during the calendar year. In this situation, your tax year will differ from the calendar year, meaning due dates will also vary.
For example, if you begin your year in February of 2022, your tax year ends in March of 2023.
A critical regulation to keep note of is fiscal tax years can’t end in December.
What Makes Startups Use A Fiscal Year Instead Of A Calendar Year?
A startup might choose to operate in a fiscal year for several reasons.
For example, a company may opt for the fiscal year if it has significant losses during a specific season. A startup with high holiday and low summer sales would end its fiscal year after peak. Splitting the year this way gives a more accurate view of the company's performance.
Some startups use the alternative tax year to manage their cash flow. For example, a company that sees high revenue in January but only purchases inventory in September. By adapting to the business cycle, they record high profits and expenses together.
When Are Fiscal Year Tax Returns Due?
Your fiscal year tax return due date is the 15th day of the fourth month after your tax year ends. For example, suppose your tax year runs from June 1 to May 31. In that case, you must file your return by Sept. 15.
The IRS may require your organization to pay payroll taxes or quarterly estimated tax payments throughout the year. You can use the IRS website or speak to a tax advisor to track any coming tax due dates.
Where Do I Find The Forms I Need To File?
Depending on the type of business you run and where you live, there may be different forms that you need to file during your tax year. You can find all the necessary federal taxes documents at your local IRS office or the IRS website.
You may also need to file state-specific tax forms and federal documents. Again, the requirements and forms vary depending on your location. Take time to research the laws in your state before you begin filing taxes during the fiscal year.
Some of the most common forms that startups need to file include the following:
- Form 940: Businesses use this form to report and pay the federal unemployment tax.
- Form 941: Businesses must file this quarterly form to report employee wages or taxes withheld from employees' paychecks.
- Form 1065: If your business is a partnership, you must file this form as part of your return.
- Form 1120: This is the standard corporate tax form that businesses must submit if they are incorporated or a limited liability company (LLC).
Review the instructions carefully and double-check that your financial statements are in order. Ensure your income, balance, and cash flow statements are accurate. Additionally, ensure you know the deadlines for each form so you can file your taxes on time according to your fiscal year.
Pros And Cons Of Fiscal Year Tax Filing: Should You Switch?
As a business owner, consider the implications of different tax filing options. While there is no one-size-fits-all solution, filing fiscal year income taxes has pros and cons.
The best approach is to decipher what works best for your revenue cycle and business model.
- Seasonal revenue: A fiscal year gives you more flexibility in setting a proper year to encompass your revenue highs and lows fully. You can defer some of that income until the next tax period.
- Sales Alignment: There can be competitive advantages for your company to align on a fiscal year. Trying to get a $100,000 sales deal through legal on New Years Eve can be frustrating and complex for sales reps. Using a fiscal year can be advantageous.
- Tax benefits: Startups with varying revenue and expenses can set their year up to avoid tax burdens.
- Alignment with operations: If your business operates on an annual cycle, filing taxes according to that cycle may help you better track and budget your operating expenses.
- Accounting complexity: Keeping track of your finances throughout the year and understanding what falls into each fiscal year can be complicated and time-consuming if you’re unfamiliar with the filing process.
- More paperwork: You may have to file additional forms or documents if you opt for a fiscal year tax filing period instead of using the calendar year.
- Inability to take advantage of certain credits: Some businesses may not qualify for certain deductions or credits due to the timing of their fiscal year tax filings. Significant credits like the R&D tax credit greatly impact startup costs. Compare your fiscal deadlines with tax credit deadlines before deciding.
- Additional costs: If you opt for fiscal year tax filing, you may incur additional charges associated with filing different forms or gathering the required documents.
How To Switch From A Calendar Year To A Fiscal Year
If you’ve decided that your business will be better off filing taxes outside of the calendar year, inquire with the IRS about switching before making plans. There may be restrictions, and you'll need to complete the necessary paperwork.
The change process is relatively straightforward but can become complicated depending on timing. It’s advisable to hire a tax specialist who can guide the process.
What’s The Point Of Fiscal Year Filing?
Fiscal year filing helps startups with revenue cycles. There are pros and cons, but ultimately it comes down to what’s best for your business. Fiscal year filers can apply for the same tax credits, but deadlines matter. Do your due diligence before deciding between the two.
As a SaaS business, our revenue works differently. We chose our tax filing specifically to align with our recurring revenue.
A tax advisor makes the whole process easier. Mainly an advisor with startup tax experience.
Need some tax advice? Ask us. Schedule a free consultation