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The Difference Between Calendar Year and Fiscal Year for Business Taxes

businesses use factoring companies to help the balance sheet show cash on hand for fiscal year
Learn about the business taxes and how some businesses use factoring companies to help the balance sheet.

The first time you file a tax return on behalf of your company, you must decide if you intend to report income and deductions based on a traditional calendar year or a fiscal year. The Internal Revenue Service (IRS) defines the calendar year as January 1 through December 31. A fiscal year is any consecutive 12-month period that ends on the final day of any month except December. It is normally 52 to 53 weeks long. If you opt for fiscal year reporting, it does not have to end on the last day of a month.

If you are using a factoring company that purchases your receivables during the fiscal year, you may want to check the tax implications while you sold your accounts receivable. Accounts receivable factoring services is used by companies that prefer cash on hand rather than wait for clients to pay. In some cases, large companies use a factor to trade accounts receivable for immediate cash. This props up the balance sheet before the fiscal year end and reports cash assets rather than receivables to shareholders.

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Requirements to Adopt a Tax Year

Most business owners are free to choose the type of income reporting that works best for their particular business structure. However, the IRS doesn't consider you to have chosen either fiscal year or calendar year if you simply did the following:

  • You requested an Employer Identification Number (EIN)
  • You paid estimated taxes for your first year in business
  • You requested an extension to file your business income taxes

There are certain circumstances when the IRS requires a business to adopt the calendar year reporting method. These include:

  • Your business does not have an annual accounting cycle
  • You don't keep formal records or books on your business
  • Your current tax year does not qualify as a fiscal year

If you filed your first business tax return using the calendar year structure, you are required to keep it if you later start a business as a sole proprietor, enter into a business partnership or own a controlling interest in an S corporation. The only way you can change to fiscal year reporting is to request permission from the IRS.

Partial Tax Years

If your business was not in existence for an entire calendar year or you changed your accounting period, the IRS considers this to be a short tax year. Your taxes may be figured differently as a result. The IRS requires you to file a return, regardless if you were in business for one month or all 12 months of the year. You should figure your tax bill based on the last day of your short tax year. IRS Publication 538, Accounting Periods and Methods, provides detailed information about how to do this.

Tax Year Changes

You must file IRS Form 1128, Application To Adopt, Change or Retain a Tax Year, if you want to change from one type of reporting year to the other. You are not required to pay a user fee if your request is automatically approved. You do have to pay a fee and request a ruling on behalf of your business if you are ineligible for automatic approval.

Fiscal Year Reporting Makes Sense for Seasonal Businesses

If you run a seasonal business, filing a return under the calendar year system could force you to split your seasons into two different tax years. Assuming that your company prepares profit and loss statements, calendar year reporting would show income and expenses from two different seasons on the same report. When you choose fiscal year reporting, all information from your selling season is reported on the same tax return as well as your company books.