Starting A Business? How To Choose A Tax Year
Are you starting a business? Among the myriad other decisions you will have to make, you'll need to choose a tax year. What is a tax year? And how can you choose the right one? Here are a few questions to answer.
Is a Specific Year Required?
The tax year is simply the 52-week cycle that you will use to report your income and expenses for tax purposes. While most individuals use a standard calendar year, businesses often have the freedom to choose any 52-week period.
To start finding your best tax year option, work with a business accountant to determine if there are limits to what you can choose. Partnerships, for instance, generally must choose a tax year based on the tax years of the partners. Generally, S Corporations must use a calendar year. If there are particular rules you must follow, find out this information as soon as possible.
When Will Business Start?
Many businesses that opt for a fiscal year (any tax year other than a calendar year) do so because of when they began operation. If you start operation on July 1, for instance, it is only logical to begin your tax year at this time. If you decide to change, you'll need to consult with a CPA to help notify the IRS of this change and adjust for a short fiscal year during the transition.
What Is Your Business Cycle?
The other key factor for fiscal tax years is the business cycle. Given the amount of work involved in preparing for tax filings along with everything else, many businesses choose to end their tax cycle when the business is at a slow point. If you run an outdoor recreation business, you may want to do this task in the winter when business is slower. Conversely, a school may benefit from closing its year before the kids come back in the fall.
The timing of your income and expenses is the other part of the puzzle. If you have to stock up on goods in late summer in order to sell them in the holiday season, you'll likely want to have expenses and revenue all occur in the same tax year. Allowing these to cross tax years can significantly alter your financial appearance and your tax bills.
The best way to choose a tax year that's a good fit for your company is to consult with an experienced tax accounting service. They can guide you through the choices and how to answer these important questions. And then you can move forward with getting your new business off to its best start.
For more information on CPA business tax accounting services, contact an accountant.