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Tax Implications of Using the Calendar Year vs. Fiscal Year

Last updated 03/20/2024 by

Silas Bamigbola

Edited by

Fact checked by

Summary:
A calendar year is a one-year period that starts on January 1 and ends on December 31, following the Gregorian calendar. It holds significance in individual and corporate taxation, aligning with the fiscal year for tax calculations. Understanding the calendar year is essential for managing schedules, planning events, and handling taxes.

What is a calendar year?

A calendar year, also known as the civil year, spans 365 days (366 in leap years) and runs from January 1 to December 31, based on the internationally recognized Gregorian calendar. It is divided into months, weeks, and days, serving as a fundamental framework for organizing various aspects of life.
Calendars play a crucial role in managing schedules, planning events, and marking special occasions, with modern technology making them easily accessible through digital devices like computers and smartphones.
However, it’s important to note that some regions still use different regional or religious calendars alongside the Gregorian calendar, resulting in variations in the beginning and end of the year.

Calendar year for taxation

For taxation purposes, the calendar year often aligns with the fiscal year, providing a 12-month period for calculating income tax liabilities. While many businesses choose this alignment, some opt for a different fiscal year to better suit their financial patterns or industry-specific needs.
A calendar year runs from January 1 to December 31, whereas a fiscal year can start and end at any point within the year, as long as it covers a full 12 months. Many major companies, including Google’s parent company Alphabet, Amazon, and Meta (formerly Facebook), use the calendar year as their fiscal year. However, retailers like Walmart and Target have fiscal years that differ from the calendar year to accommodate their business cycles.

Switching from a calendar to a fiscal year

Individuals who file taxes using the calendar year must continue to do so even if they start a business, become sole proprietors, or become S corporation shareholders. To switch to a fiscal year reporting, approval from the Internal Revenue Service (IRS) is required, which involves filing Form 1128.
Typically, those who adhere to the calendar year for tax filings include entities without an annual accounting period, lacking books or records, or failing to qualify for a fiscal year under current tax regulations.

Advantages and disadvantages of a calendar year

Using the calendar year for tax purposes offers simplicity, particularly for sole proprietors and small businesses, as it aligns the business owner’s and business’s tax year. Additionally, the IRS mandates specific tax filing deadlines based on the fiscal year, such as the 15th day of the third month after the fiscal year-end.
Some industries find using a different fiscal year more suitable, such as seasonal businesses that concentrate revenue during specific periods. For example, retailers like Walmart and Target, with their busiest season during December, opt for a fiscal year ending on January 31 to match revenue to expenses accurately.
Businesses seeking investments, whether from venture capital or crowdfunding platforms, may also benefit from a fiscal year. For instance, if a business receives a significant investment late in the calendar year but incurs major expenses in the following year, aligning with a calendar year could result in a substantial tax burden.
Weigh the risks and benefits
Here is a list of the benefits and drawbacks to consider.
Pros
  • Simplicity for tax reporting
  • Alignment with business owner’s tax year
  • IRS-mandated tax deadlines
Cons
  • May not suit all industries
  • Could lead to tax burden in specific scenarios

Frequently asked questions

What is a calendar year?

A calendar year is a one-year period starting on January 1 and ending on December 31, based on the Gregorian calendar.

How does the calendar year relate to taxation?

For taxation purposes, many individuals and businesses use the calendar year as their fiscal year, aligning their tax calculations with this 12-month period.

Can a business change its fiscal year from a calendar year?

Yes, a business can switch to a fiscal year different from the calendar year, but it requires approval from the IRS, typically involving the filing of Form 1128.

Are there advantages to using a calendar year for tax reporting?

Yes, using the calendar year can simplify tax reporting, especially for small businesses, and it aligns with the business owner’s tax year.

Why do some businesses choose a fiscal year that doesn’t coincide with the calendar year?

Some businesses, like seasonal retailers, may select a fiscal year that better matches their revenue and expense patterns, while others do so for strategic financial reasons.

Key takeaways

  • A calendar year spans from January 1 to December 31, following the Gregorian calendar.
  • It is commonly used for tax purposes, aligning with the fiscal year for many individuals and businesses.
  • Switching from a calendar year to a fiscal year requires IRS approval through Form 1128.
  • Advantages of the calendar year include simplicity in tax reporting and alignment with the business owner’s tax year.
  • Some businesses choose a fiscal year that differs from the calendar year based on their financial patterns and industry-specific needs.

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