Managing your budgets using a fiscal-year calendar, rather than a standard calendar can be a pain because you’ll be operating on a different schedule than your vendors, government agencies and clients -- but those reasons also offer benefits. Deadlines that differ from most other companies’ can give you, your service providers and your clients more breathing room to handle financial matters.
A fiscal year refers to the 12-month period when your annual budget and financial reporting starts and ends. While a fiscal year can start on January 1 and end on December 31, this timeframe is usually referred to as a calendar year, with the term “fiscal year” often referring to a 12-month period that starts on a date other than January 1. Every company has a fiscal year, whether it starts on January 1 or another date.
Depending on if and how your business is incorporated, you might need to use the same fiscal year for your personal and corporate taxes, which for most individuals is a calendar year. A C corporation that is not a personal services corporation may use a fiscal year, recording income and expenses during a fiscal year and paying taxes on that income or declaring the deductions during the calendar year.
If you have a business that generates most of its revenues at one time of year, and expenses during the next calendar year, you might want to go to a fiscal year. For example, if you have an annual promotion in November that generates significant sales, but your expenses aren't paid until January or February of the next year, your spending won't reflect this year's sales. If you are a membership organization and your dues are due in December, but you service the members the rest of the year, a fiscal year that starts December 1 lets you put those revenues and service costs in the same year.
If you and your business partners all use a calendar year for your fiscal year, you might all be busy preparing your budgets, year-end reports and tax documents at the same time. At a time when you might be swamped and need quick access to financial data, the company you need them from might also be busy with accounting responsibilities and delay getting back to you. Operating on a fiscal year, such as from July 1 to June 30, can help you avoid working with partners who are busy at the same time of the year you are.
The busiest time of year for many tax preparers is spring, leading up to the March 15 and April 15 corporate and personal income tax filing deadlines. During this time, your tax preparer might be too busy to give you the time you need to discuss your taxes. While you can file for an extension, your taxes will be due at the same time as every other client of your tax preparer who filed for an extension. A fiscal year that avoids the main two IRS filing periods will let your tax expert spend more time working on your account.
If you earn most of your income during a specific season of the year, or hold a large event, like an annual conference, trade show or tournament, it might be best to end your fiscal year shortly after that season or event. Seeing the results of your peak-season sales or annual event can help you better plan next year’s budgets. You can also use that large influx of cash to pay deferred debts or obligations, such as quarterly tax payments. Even if revenue is not an issue, having to prepare information for taxes during your peak season can distract you from your sales and customer service efforts.
If you use an accounting contractor and/or tax preparer who rely on seasonal work for most of their revenue, you might be able to negotiate lower fees for off-season work than they charge during their peak season. This cost savings probably won’t be enough to justify a fiscal year that’s different from a calendar year, but is a benefit of operating on a fiscal year you should consider.