The IRS wants to see your books in twelve-month batches. That doesn’t mean you have to file your tax return based on the calendar year, though. If a January 1 start and a December 31 close doesn’t make sense for your business, you have the option to change to a fiscal year.
With this type of tax year, your new account period encompasses twelve consecutive months ending on the last day of any month (except December, because you would then be using a calendar year).
Most commonly, we see tech companies adopt a fiscal year that runs from March 1 to February 28 or July 1 to June 30. If you get a rush of business during the holiday season, for example, changing to one of these different years might enable easier accounting for your business because that rush won’t coincide with year-end tax to-dos.
Once you make this change, your new tax filing deadline will fall three and a half months after your fiscal year’s end.
So, when can swapping to a fiscal year be an advantage? And if you want to pursue it for your business, how do you do it? We outline all of that here.
Reasons why you may want to change your accounting period
Founders might have any number of reasons for changing to the fiscal year of their choosing. Some of the most common we see for tech startups include:
- Seasonality in the business
- The means to better align income and expenses (if subscriptions come in at the end of the year but the investment to fulfill those customer orders will happen in the next year, for example, a calendar year makes it harder to match income and expenses)
- Matching the fiscal year of key customers
- Syncing with the fiscal year of the company merging with or acquiring the tech company (in fact, this can even be a sales tactic to align with ideal M&A targets)
- Changing the tax filing deadline to better match availability from the finance/accounting team
- Aligning with the fiscal year of the company headquarters (this is especially common with European parent companies, which often don’t follow the calendar year)
Say, for example, that a nonprofit holds a gala every January, but all of the expenses for that happen in the prior year and the revenue from the gala comes in in February. A fiscal year that keeps all of that revenue and expenses in the same accounting period makes filing easier for that nonprofit.
How to change your tech company’s fiscal year
To fully move to your new fiscal year, you need to take three steps:
File Form 1128
To inform the IRS of your new accounting period, you first need to file Form 1128, Application To Adopt, Change, or Retain a Tax Year. This form is only a few pages long, but parts of it are fairly technical. Talking with your accountant helps here.
That said, we do have one tip to clear up a point of confusion. Where you see “Applicant’s identifying number (see instructions)” at the beginning of Part I, input your employer identification number (EIN). The language for that form field is vague because some individuals choose to change their accounting period, and they’ll input their SSN there.
Unless you qualify for automatic approval (which you’ll determine as you fill out the form), you’ll need to wait for the green light from the IRS before adopting your new fiscal year.
To get a better idea of if you might qualify for automatic approval, jump to the “Section A—Corporations (Other Than S Corporations or Personal Service Corporations)” section of the IRS’s instructions on completing Form 1128. It walks you through the three qualifying criteria individually.
File a short-year return
Next, you need to file a return to wrap up your current accounting period so you can start your new fiscal year on your chosen date.
If, for example, you decide in February that you want to switch to a July 1–June 30 fiscal year, you need to file a short-year return for January 1 of your current year to June 30. This allows you to start your new accounting period of July 1, moving forward with your fiscal year from that point onward.
File successive tax returns and requests for extensions in line with your new fiscal year
Your new tax return deadline falls three months and fifteen days after the end of the fiscal year you adopted. So in the above example of a fiscal year ending on July 1, the new filing deadline would be October 15.
If you have reminders in your calendar or regularly scheduled meetings with your accountant surrounding your tax deadline, move all of those once you complete your short-year tax filing.
If your business ever needs to request an extension on its tax filing deadline, keep in mind that the extension will give you until six months past your new filing deadline (not the calendar-year extension filer’s deadline of October 15).
When to engage your accountant
It’s easiest to never have to file Form 1128. If you’re currently founding your company, talk with your accountant about the business cycle you anticipate. This can help you determine the right fiscal year to use for your specific business.
If you’re already using the calendar year and you’re thinking about changing, the best time to loop in your accountant is at the start of the year. This way, they’ll be engaged from the start of the short year that you’ll need to file.
At minimum, you should aim to give your accountant two month’s notice before you want to adopt the new fiscal year. This gives them time to file Form 1128, hear back from the IRS (if needed), and prepare your short-year tax filing.
Whether you’re just curious about changing the accounting period at your tech company or you’re ready to start the fiscal year changeover process, we’re here to help. Our team has supported plenty of startups in successfully moving from the calendar year to the accounting period that’s right for them. To chat with our staff of experts or for help filing Form 1128 and your short-year return, contact us.