Tax Implications of A Fiscal Year-End

Sep 03, 2015

For a majority of businesses, tax years are pretty straight forward. The calendar turns over to a new year and so does your business. These businesses use a calendar year-end, and the year on tax forms aligns with the year of operations. However, those businesses not on a calendar year-end fiscal years can be much more confusing.

According to the 2014 instructions for most business tax returns, the 2014 return is used for “fiscal years that begin in 2014 and end in 2015.” In other words, a business with a fiscal year-end will use the tax form for the year in which the fiscal year starts. Therefore, if a business has a fiscal year that starts July 1, 2014 and ends June 30, 2015, it will have a 2015 fiscal year end, but a 2014 tax year.

To add an additional layer of confusion, if the business which has the fiscal year-end is a flow-through entity and the K-1 recipient is on a calendar year, the K-1 recipient will report the income on their tax return in the year in which the business’ fiscal year ends. Going back to the example of a business whose fiscal year starts July 1, 2014 and ends June 30, 2015, the income will be reported on the K-1 recipients’ 2015 return even though it is provided on a 2014 K-1. As noted above, the information is provided on the 2014 K-1 because it is the business’ 2014 tax year.

Office_Calendar3An additional issue causing complications with fiscal year-end tax returns is that many tax policies are passed on a calendar year-end basis. For example, bonus depreciation tax policies are frequently passed subsequent to year-end and are retroactively applied to the beginning of the year. If a fiscal year ends and the tax return is due prior to bonus depreciation being extended, the business will not be able to take bonus depreciation on any fixed asset additions from January 1 through the fiscal year-end. Then if bonus depreciation is subsequently extended, the business would have to file an amended return if they want to claim bonus depreciation for that period.

So if a fiscal year-end can cause so many issues, why would a business elect to use a fiscal year-end? The most common reason is to match revenues with expenses. If a business has seasonality, a fiscal year-end can be used to ensure that all activity of one season is included in a single year. For example, the NFL uses a year-end of March 31 because the season is still in progress at December 31. A business might also want to use a fiscal year-end if they have cycles with very large amounts of inventory during certain parts of the year and low amounts at other times. Choosing a year-end when inventory is low allows for easier inventory valuation and also tends to be a slower time of the year, which allows additional time to be spent preparing information for the tax return.

Even though fiscal year-ends can cause some confusion and complications, for some businesses it is the best choice. If you have questions about your fiscal year-end, or if you feel that switching to a fiscal year-end would be beneficial for your business, our team at William Vaughan Company would be happy to assist you and provide the answers you need.

By: Mark Sawyer, Senior Accountant

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