NO, DON’T DO IT.
NO. NO. NO.
Do not change your startup’s fiscal year end. Keep it to Dec 31.
Generally, we highly advise clients against changing their tax year (and fiscal year) unless there is a very strong business purpose in order to avoid pitfalls of missed tax and statutory deadlines. Some deadlines will shift with a company’s fiscal year (such as the corporate income tax return), while other deadlines will remain on a calendar basis, depending on jurisdiction and type of tax (1099s, payroll taxes, sales taxes, property taxes, etc.). Overall, this complicates tax compliance heavily while providing very little benefit.
Additionally, your startup tax CPA would need to file a short year-year return for the year in which the change would occur, which would mean two tax returns in one year.
Startups can present any fiscal period to their board
If you are looking into a change of fiscal year because of a presentation standpoint, you can always present your financials to the board in any given increment you like (6/1/24-5/31/25) or one that better illustrates the life cycle of the business as this would not complicate the tax return filing. What you show your board is between you and your board/investors. But what you show the tax authorities.. that’s a different matter.
How to change your tax fiscal year end
….But if you (are a crazy person and) decide to change your fiscal year end, here’s how to do it for Federal tax purposes:
IRS approval is required to change your tax year end, but under certain circumstances, a C-corporation can change tax year end under automatic approval procedures.
Among the basic requirements to qualify for an automatic change:
- the corporation must not have changed its tax year within the prior 48 months;
- the corporation must annualize its taxable income for a short tax year (This means that a startup with a 1/31 fiscal year end would file a 1-month short year-year return for 1/1/2018-1/31/2018, but annualize the income to ensure that the company is not getting any benefits from short-year tax attributes).
- various other requirements to ensure the year-end change is not a method of tax avoidance (about a dozen other rules, but most are not applicable to startups).
A corporation, which does not qualify for an automatic change may still be able to obtain consent from the IRS for the change under the non-automatic procedures as long as it can establish a valid business purpose (note: reduction or avoidance of tax is not considered a valid business purpose). IRS has prescribed a series of tests for establishing a business purpose for a requested annual accounting period - testing when revenue is earned, or the natural business cycle of the company, or other “facts & circumstances”.
To request permission from the IRS for a change (including changes which are automatically approved), the company must file Form 1128 (Application for Change in Accounting Period) no later than the due date for the federal tax return for the short tax year, but no earlier than the last day of your short year (So a startup with a 1/31 fiscal year end must apply for the change between January 1, 2023 and May 15, 2023 after the short tax year ending 1/31/2023).
IRS approval on new fiscal year end
If you receive IRS approval for your short tax year ending 1/31, your short-year-return 2023 (and all subsequent fiscal year returns) would be due May 15, but can be extended to November 15 each year. As mentioned above, many of your other tax filing deadlines would remain on a calendar basis (such as payroll tax, W-2s, 1099s, certain state taxes, property taxes, sales taxes, etc.).
Since most startups at the Seed - Series B stage is a loss company (and since tax rates have recently all been lowed to a flat 21% for C-corporations) I don’t anticipate any tax complications from a change in year-end.
One danger for startups that change their fiscal year end
Founders need to be aware that they may have to file a stub year tax return. There are many different tax incentives that startups can get, like and R&D tax credit, that can offset taxable income or even reduce tax burdens like payroll taxes. However, these are often time-boxed, in that a startup can only use them for a certain number of years since founding, or since starting to generate revenue, for so many tax filings, etc. And founders need to realize that the stub year tax return that they need to file when they change their fiscal year end counts as one of these years. I’ve seen startups miss out on one hundred plus thousand dollar tax credits because of a stub fiscal year. So be careful - and as always, consult your tax CPA.
