Should you use a standard calendar year for your business?
Every once in a while, you hear about different calendars that are used for specific entities. The federal government runs from October to September. Many companies operate from July until June. But why are these fiscal years different than the standard calendar year? Why do some entities decide to operate using a different fiscal calendar, and should you do the same for your business?
Here are some examples of situations where you should consider what type of calendar to use for your company's fiscal year.
First and foremost, your business organization will determine how easily you can choose to use a different fiscal year. Businesses that are not considered separate from their owners, such as sole proprietors, partnerships and similar organizations will need to petition the IRS for special consideration to use a different fiscal year and will need to provide documentation about why it's needed. Corporations, on the other hand, are usually free to use whatever fiscal year they choose, as the company files its own taxes rather than as part of the owner's income taxes.
Generally speaking, a fiscal year can be any period of 12 full months that starts anytime other than January 1. Here are some reasons to change your fiscal year:
Your company tends to create expenses later in one year and income early the next. If you produce flower vases for Valentine's Day, you'll probably create them in October or November, but won't sell most of them until January or February.
You're planning a funding drive, like Kickstarter, which will produce high income late in the year with no expenses, as production will start in January. This also causes a false high income for one year without reflecting the associated expenses.
Your major customers use a different fiscal calendar. If you're a federal government contractor, you may want to change your fiscal calendar to match.
By considering your company's specific situation, you can better decide when a calendar year is appropriate versus a different fiscal year. If you're ready to switch to a different fiscal year and need help setting up your accounting software to recognize this change, AccountRely can help. Contact us today and find out what it's like being treated as part of the family.