Deciding on Your Tax Year

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When you begin a business, you will need to decide on what tax year to use. A tax year refers to the accounting period used for your financial records, reporting income and expenses, and filing to the IRS. This means that you are going to keep a set schedule for your books and taxes for the year.

There are two types of tax years :

• Calendar Year ” If you choose a calendar year then you will need to begin bookkeeping on January 1st and finish on December 31st of each year. Most businesses choose the calendar year method because it is easier and parallels their personal income filing. If you are a sole proprietor, in business for yourself and by yourself, then the IRS requires that you file according to the calendar year.

• Fiscal Year ” Like the calendar year, a fiscal year covers a 12-month period. You may end your fiscal year on the last day of any month except December. Remember that the last day in the calendar year is December. In other words, if you choose to start a tax year on March 1st, then according to the fiscal year system, your tax year will end on February 15th. In addition, special requirements apply to fiscal year requirements. The first year can always be a short calendar year.

Write this down

If you intend to change your tax year, contact the IRS by completing Form 1128. Naturally, there will be a fee.

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