Have you ever wondered about the specific dates when the tax year begins and ends? Understanding the timeline of the tax year is essential for every individual and business to ensure compliance with tax laws. Whether you’re filing your taxes or planning your financial decisions, knowing these dates can save you from any last-minute scrambling. So, let’s demystify the quandary and discover when exactly the tax year starts and ends.
Definition of Tax Year
Calendar Year
The tax year refers to the specific period of time that individuals, businesses, partnerships, S Corporations, C Corporations, trusts, and estates use to calculate and report their income and pay taxes. For many entities, the tax year aligns with the calendar year. In other words, it begins on January 1st and ends on December 31st. This is known as the calendar year tax year.
Fiscal Year
However, some entities choose to use a fiscal year as their tax year. A fiscal year is any 12-month period that does not necessarily align with the calendar year. It can begin on any date and end on the corresponding date in the following year. For example, a fiscal year may start on July 1st and end on June 30th. This option is often chosen by businesses whose financial reporting and operations do not align with the traditional calendar year.
Short Tax Year
In certain situations, entities may experience a short tax year. This occurs when the tax year does not cover a full 12-month period. Short tax years can be the result of various circumstances, such as a change in accounting methods, formation or dissolution of an entity, or an entity’s initial year of existence.
Tax Year for Individuals
Calendar Year
For most individuals, the tax year is the same as the calendar year. That means your tax year begins on January 1st and ends on December 31st. You need to report your income, deductions, and credits during this period and file your tax return by the designated deadline.
Fiscal Year
In some cases, individuals may choose to follow a fiscal year as their tax year. However, this is more commonly seen in businesses rather than individual taxpayers.
Changing Tax Year
Generally, individuals cannot change their tax year unless they receive approval from the Internal Revenue Service (IRS) by filing Form 1128. The IRS only grants approval if there is a valid business purpose or a natural business year applies.
Tax Year for Businesses
Calendar Year
Many businesses operate on a calendar year tax year. This means their tax year coincides with the traditional January 1st to December 31st period. It simplifies the reporting process as it aligns with standard financial reports and makes it easier for businesses to calculate their taxes.
Fiscal Year
Certain businesses, however, choose a fiscal year as their tax year. Small businesses or industries with specific operational cycles often find it advantageous to have a fiscal year that better aligns with their financial reporting. This allows them to capture seasonal sales fluctuations or accommodate specific business needs.
Changing Tax Year
To change the tax year, businesses need to submit Form 1128 to the IRS for approval. They are required to provide a valid business reason for the change, such as a merger, acquisition, or a change in the nature of the business.
Tax Year for Partnerships
Calendar Year
Partnerships, which are usually formed by two or more individuals or entities, follow a specific tax year. Just like individuals and businesses, partnerships often choose the calendar year as their tax year.
Fiscal Year
However, certain partnerships may choose a fiscal year as their tax year based on their business needs. This can be particularly useful if a partnership wants to align its tax year with the tax year of its partners or if partners have different fiscal years themselves.
Changing Tax Year
Partnerships must also submit Form 1128 to the IRS to request a change in their tax year, providing a valid business reason.
Tax Year for S Corporations
Calendar Year
S Corporations, a type of business structure often chosen by small businesses, commonly follow the calendar year as their tax year. This simplifies the reporting process and ensures consistency with individual shareholders’ tax returns.
Fiscal Year
S Corporations may choose a fiscal year under certain circumstances. For example, if the corporation has a valid business reason related to its operations or if its shareholders have different fiscal years.
Changing Tax Year
To change the tax year, S Corporations must follow the same process as other entities and submit Form 1128 to the IRS for approval.
Tax Year for C Corporations
Calendar Year
C Corporations, which are typically larger entities, often operate on the calendar year tax year. This aligns with their financial reporting and simplifies tax planning, as it coincides with the individual tax filing deadline.
Fiscal Year
C Corporations may opt for a fiscal year if there is a legitimate business reason to do so. This flexibility allows them to adapt their tax year to the specific needs of their industry or operational cycles.
Changing Tax Year
To change the tax year, C Corporations are required to obtain approval from the IRS by filing Form 1128 and providing a valid business reason for the change.
Tax Year for Trusts and Estates
Calendar Year
Trusts and estates, which manage and distribute assets on behalf of beneficiaries, generally follow a calendar year tax year. This helps ensure consistency and simplifies reporting for both the entity and the beneficiaries.
Fiscal Year
In some cases, a trust or estate may choose a fiscal year as their tax year. This choice depends on factors such as the nature of the assets held, the beneficiaries’ tax situations, or specific requirements outlined in the trust or estate documents.
Changing Tax Year
Similar to other entities, trusts and estates must request a change in their tax year by filing Form 1128 with the IRS.
Special Rules for Specific Entities
Flow-Through Entities
Flow-through entities, such as partnerships and S Corporations, distribute their income, deductions, and credits to their partners or shareholders. These entities generally follow the same tax year as their owners, allowing for better alignment and tax planning.
Partnerships with Fiscal Year
Partnerships that choose a fiscal year must ensure that the tax year-end falls within the same calendar year for all the partners. This requirement helps maintain consistency in reporting and avoids complications for the partners’ individual tax returns.
S Corporations with Short Tax Year
If an S Corporation experiences a short tax year due to formation, dissolution, or a change in accounting periods, they may need to file a special tax return for that period. This ensures that the income and expenses for the short tax year are properly accounted for.
Important Deadlines and Filing Dates
Individual Tax Returns
For individuals using the calendar year tax year, the tax return filing due date is typically April 15th. However, if the 15th falls on a weekend or holiday, the deadline may be extended to the following business day. Extensions can also be requested, allowing individuals to file their tax returns by October 15th.
Business Tax Returns
Businesses using the calendar year tax year generally have a March 15th deadline for filing their tax returns on Form 1120, while S Corporations file on Form 1120S. Fiscal year filers have different deadlines based on their year-end date, typically falling on the 15th day of the third month following the end of the fiscal year.
Estimated Tax Payments
Both individuals and businesses may need to make estimated tax payments throughout the tax year if their taxes are not withheld adequately. These payments are generally due in quarterly installments, with due dates falling on April 15th, June 15th, September 15th, and January 15th (of the following year), or the following business day if it falls on a weekend or holiday.
Extensions and Exceptions
Extensions for Individuals
If individuals require additional time to file their tax return, they can file Form 4868 to request an automatic extension until October 15th. However, it is important to note that an extension to file does not grant an extension to pay any taxes owed. Individuals must still estimate and pay any taxes owed by the original filing deadline to avoid penalties and interest.
Extensions for Businesses
Businesses can also request an extension to file their tax returns if they need more time. C Corporations file Form 7004 to request an automatic extension, while S Corporations file Form 1138. Similarly, an extension to file does not extend the deadline for paying any taxes owed.
Exceptions for Specific Circumstances
In certain circumstances, taxpayers may be granted special tax year exceptions. For example, if a business experiences a disaster or qualifies for disaster relief, it may be eligible for a tax year exception. These exceptions are determined on a case-by-case basis and should be discussed with a tax professional or the IRS.
In conclusion, the tax year serves as the defined period for which individuals, businesses, partnerships, and other entities calculate and report their income and pay taxes. Whether it aligns with the calendar year or follows a fiscal year, understanding the tax year and its implications is essential for meeting filing deadlines, ensuring accurate reporting, and avoiding penalties. Consulting with a tax professional can provide further guidance on navigating the complexities of different tax years and any specific considerations for your individual or business tax situation.
Leave a Reply