Businesses that operate as C corporations have substantial flexibility when selecting a tax year. However, businesses that operate as partnerships or S corporations are restricted by law in their choice of a tax year. Once selected, a tax year generally must be maintained until the business is required or elects (with the IRS permission, if necessary) to change it.
There are two types of tax years:
a. Calendar Tax Year. A calendar tax year is a period of 12 consecutive months beginning January 1st and ending December 31st.
b. Fiscal Tax Year. A fiscal tax year is a period of 12 consecutive months ending on the last day of any month other than December, or 52-53 week period that ends on a specific day of the week occurring either in the last week or nearest the last day of a specific month.
If there is no reason for choosing a specific year-end for financial reporting, eligible businesses should consider a fiscal year if their own natural business suggests it. Many businesses have a cycle, so that certain times of the year are less busy than others. If available, manufacturers, for example, often choose a tax year corresponding to their natural business cycle, which generally ends just after the highest annual sales period for the business. Year-end financial statements that reflect the natural business year will generally present a more liquid position due to lower inventories and the sales peak just experienced.
A business that operates as a C corporation establishes an annual period as its calendar or fiscal tax year by (a) maintaining books and records on the same basis, and (b) filing the initial tax return based on that period. If books and records are not maintained to establish a fiscal year, the corporation will use a calendar tax year. A C corporation must adopt a tax year by the due date (not including extensions) of the return for the corporation’s first tax year. The initial return cannot include more than 12 months, but may include fewer, resulting in a short year.
A 52-53 week fiscal tax year is an annual period that varies from 52-53 weeks. Any new eligible C corporation that maintains its books and records on a 52-53 week year-end can adopt a 52-53 week year for tax purposes. The tax year always ends on the same day of the week, and always ends –
a. on whatever date that day of the week last occurs in a calendar month (e.g. the last Monday in July) or
b. on whatever date that day of the week falls nearest to the last day of the calendar month (e.g., the Monday closest the end of July).
Observation: If the first method is used, the tax year can end up to six days before the end of the calendar month the year ends. If the second method is used, the fiscal year can end as many as three days before or after the end of the month.