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Calendar Year vs Fiscal Year

A calendar year and a fiscal year are different ways of defining the accounting period used by corporations and LLCs for tax and financial reporting.

Here's the key difference and considerations:

1. Calendar Year:

  • Runs from January 1 to December 31.

  • Most businesses use the calendar year by default.

  • Simpler alignment with personal taxes (especially for pass-through entities).

2. Fiscal Year:

  • A consecutive 12-month period ending on any month other than December.

  • Common for businesses whose operational or revenue cycles don't align with the calendar year (e.g., retail businesses ending their fiscal year after holiday seasons).

Choosing Calendar vs. Fiscal Year for Corporations & LLCs:

Consideration Calendar Year Fiscal Year
Alignment with personal taxes Ideal for pass-through entities (LLCs, S Corps). Not necessarily aligned; may complicate individual tax filings.
Industry practices Common for many businesses. Often used in industries with seasonal fluctuations (education, retail, agriculture).
Reporting and Compliance Easier; aligns with standard IRS deadlines. Customized, potentially more complex, requiring IRS approval.
Cash Flow Management Standard year-end, sometimes mismatched to operations. Allows strategic alignment with revenue cycles.
IRS Requirements:

  • LLCs: Typically adopt calendar years unless they obtain IRS approval for fiscal-year adoption, which usually involves demonstrating a legitimate business purpose.

  • Corporations: Can select a fiscal year-end at inception; changing fiscal years later requires IRS approval via Form 1128.

Common Scenarios:

  • Calendar Year: Most small businesses, professional services, LLCs taxed as partnerships or sole proprietorships.

  • Fiscal Year: Retailers ending after holiday shopping, educational institutions aligning with academic years, agricultural businesses aligning with harvest cycles.

In summary, the choice between a calendar and fiscal year depends on alignment with operational cycles, industry norms, tax strategies, and reporting convenience.

 
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