Calendar or Fiscal Year: Picking a Tax Year
Who can use a year that ends in a month other than December, why pass-through businesses mostly cannot, and what it takes to change.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A tax year is the 12-month period a business reports on. Sole proprietors and most pass-through businesses must use the calendar year. A C corporation may choose any fiscal year ending at a month-end. S corporations and partnerships may use a fiscal year only with a business purpose, such as a natural business year, or a Section 444 election.
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Who can use what?
| Business | Permitted tax year |
|---|---|
| Sole proprietor | Calendar year (the owner's year), with rare exceptions |
| C corporation | Any fiscal year ending on the last day of a month, chosen on the first return |
| S corporation | Calendar year, unless a natural business year is shown or a Section 444 election is made |
| Partnership or LLC taxed as one | The year of the majority partners, usually calendar; same exceptions |
| Personal service corporation | Calendar year, with the same exceptions |
Why would a business want a fiscal year?
A seasonal business can close its books after the busy season — a landscaping company ending its year on November 30, a retailer on January 31 — when inventory is low and the picture is clear. Fiscal years also stagger the owner's workload away from the personal return deadline and can shift a short-lived deferral of income for C corporation owners who take bonuses.
What is a natural business year?
A year in which at least 25 percent of gross receipts fall in the last two months, for each of the three most recent 12-month periods (Rev. Proc. 2006-46), with no other year producing a higher average. A business that passes this test can adopt that year without a required payment. The IRS also recognizes a few other tests based on ownership and industry practice.
What is the Section 444 election?
A pass-through business can elect, on Form 8716, a fiscal year that ends no more than three months before its required year — for example, September 30 for a calendar-year-required S corporation. The price is a "required payment" each year, calculated on Form 8752, that roughly equals the tax deferral the owners receive, held by the IRS without interest. The election rarely saves money; it buys timing.
How is a tax year adopted or changed?
Adopt by filing the first return on time with the chosen year. Change by filing Form 1128; many changes to a required or natural business year are automatic, others need a ruling. A change creates a short tax year, which must be filed, with annualized income for a C corporation.
Frequently asked questions
Can an LLC taxed as a partnership pick December 31 if its owners are corporations with June years?
The partnership must generally use the year of its majority owners — here, June 30. December 31 would be a six-month deferral, too long for a Section 444 election, so it would need an IRS-approved business purpose.
Does a fiscal year change the owners' deadlines?
An S corporation with a September 30 year files by December 15, but shareholders still report the K-1 on their calendar-year returns.
Is a 52–53 week year allowed?
Yes. A year that always ends on the same day of the week (for example, the last Saturday in January) is permitted and common in retail.
What if my first year was less than 12 months?
That is a short year; you still file, and the year you chose on that return becomes your tax year.
Official sources
The IRS explains: “Generally, partnerships, S corporations (including electing S corporations), and PSCs must use a required tax year. A required tax year is a tax year that is required under the Internal Revenue Code and Treasury Regulations.” — Internal Revenue Service, Publication 538 (01/2022), Accounting Periods and Methods, https://www.irs.gov/publications/p538
The IRS explains: “File Form 1128 to request a change in tax year. Partnerships, S corporations, personal service corporations (PSCs), or trusts may be required to file the form to adopt or retain a certain tax year.” — Internal Revenue Service, About Form 1128, Application to Adopt, Change or Retain a Tax Year, https://www.irs.gov/forms-pubs/about-form-1128
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk advises on the tax year at formation, when the choice is still free. See pricing or book a free fit call.
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