Quick overview

The U.S. tax system lets most taxpayers report income using either a calendar year or an IRS‑approved fiscal year. That choice determines your return’s “tax year,” the deadlines you must meet, and how some tax rules (like estimated payments and accounting methods) apply. For many individuals the calendar year is the default; many businesses pick a fiscal year to match operational cycles.

(Official IRS guidance on choosing a tax year is available at the IRS website: About Calendar Year and Fiscal Year.)

How the two filing cycles differ in practice

  • Calendar year — runs January 1 through December 31. Most individuals and many small businesses use this. Individual federal individual income tax returns (Form 1040) for calendar‑year taxpayers are generally due the 15th day of the fourth month after year end (commonly April 15, subject to weekend/holiday adjustments).

  • Fiscal year — any 12‑month period that ends on the last day of a month other than December. For businesses, the return due date is generally either the 15th day of the third month (S corporations and partnerships) or the fourth month (C corporations) after the fiscal year end, depending on entity type and the specific return form.

Examples:

  • A calendar‑year C corporation files Form 1120 by April 15. A fiscal‑year C corporation with a June 30 year end files its Form 1120 by October 15 (fourth month after June 30).
  • Partnerships and S corporations file by the 15th day of the third month after the close of their tax year (e.g., March 15 for calendar‑year partnerships and S corps).

(See IRS guidance for specific form deadlines and exceptions for weekends/holidays: Forms 1120, 1120‑S, and 1065; and the general “About Calendar Year and Fiscal Year” resource.)

Who can choose a fiscal year and who can’t

  • Individuals (most taxpayers): generally must use a calendar year unless they qualify to use a fiscal year for a business purpose and obtain IRS approval.
  • Corporations: may adopt a fiscal year, subject to IRS rules and potential restrictions for tax accounting methods.
  • Partnerships and S corporations: may use a fiscal year in certain circumstances, but S corporations typically use the calendar year unless a valid business purpose exists.

Changing an existing tax year usually requires filing Form 1128 (Application to Adopt, Change, or Retain a Tax Year) or following automatic change procedures if eligible. The IRS provides both automatic and non‑automatic consent processes; requirements and documentation differ. (Link: IRS Form 1128.)

Tax mechanics and accounting consequences to know

  1. Short‑period (stub) return: When you change tax years you often file a short‑period return that covers less than 12 months. That return may produce timing differences in income and deductions.
  2. Section 481(a) adjustments: The IRS requires adjustments to prevent a duplicate or omitted income recognition when you change tax years. This IRC adjustment spreads certain items over multiple years and can affect taxable income in the year of change.
  3. Estimated tax and payroll alignment: Estimated tax schedules and quarter‑end reporting often shift when you change year ends. For example, corporate estimated tax payment dates depend on the corporation’s tax year, so changing your year can change payment timing.
  4. State tax conformity: State tax authorities don’t always conform to federal year‑end changes. After changing your federal tax year, check each relevant state department of revenue for filing requirements and potential additional forms.

Authoritative reading: IRS instructions for Form 1128 and the relevant return instructions (Form 1120, 1120‑S, 1065, and Form 1040) provide details on short periods and special rules.

Practical pros and cons — what I tell clients

In my practice advising small businesses and nonprofits for 15+ years, I use two tests when evaluating a tax year change:

  1. Operational alignment: Does a fiscal year match the company’s cash flow and key business season? Aligning year end with a slow period can give more time to prepare year‑end reports and plan tax moves.
  2. Compliance overhead: Changing a tax year requires planning for Form 1128, potential Section 481 adjustments, and modified estimated tax timing. For many small businesses the compliance cost outweighs the convenience.

Pros of a fiscal year:

  • Better alignment with business cycles (seasonal sales, fundraising, or inventory turnover).
  • Smoother budgeting and internal reporting when the fiscal year matches the operating cycle.

Cons of a fiscal year:

  • Extra administrative work and potential IRS approval steps.
  • Possible complexity with multi‑state filings and payroll tax calendars.
  • Timing quirks with deductions and income recognition (short‑period returns, Section 481(a)).

A real example: I advised a retail client who switched to a July 1–June 30 fiscal year. The change allowed year‑end inventory and peak season sales to settle before closing the books. The benefits outweighed the short period filing and the one‑time Section 481 spread.

Steps to change your tax year (high level)

  1. Confirm eligibility for automatic change (some taxpayers qualify). If not automatic, prepare a Form 1128 application with reasons and supporting documentation.
  2. Plan for the short‑period return and compute any Section 481(a) adjustment with your tax preparer or CPA.
  3. Check state rules and update payroll and estimated tax payment schedules.
  4. File the application and await IRS consent (or comply with the automatic procedure). Don’t assume approval—submit early to avoid missed deadlines.

IRS resource: Form 1128 instructions and the IRS page on tax years and accounting periods.

Common mistakes and how to avoid them

  • Assuming a tax‑year change is simple: It often requires a formal application and technical adjustments.
  • Missing new estimated‑tax deadlines: Recalculate your quarterly payments when year end changes.
  • Forgetting state filing requirements: Some states require separate approval or have different filing calendars. Check state revenue sites.

To reduce risk, use a checklist and coordinate the change with payroll, accounting software, and your bank/credit lines.

If you want a practical compliance checklist, see our guide on how to set up a compliance calendar to avoid penalties (internal resource: “How to Set Up a Compliance Calendar to Avoid Penalties”).

Quick decision checklist (for business owners)

  • Does your revenue cycle cluster in certain months (seasonal)? If yes, a fiscal year may help.
  • Are the administrative costs (Form 1128, short period computations, possible professional fees) acceptable compared with the tax/operational benefits?
  • Will changing your tax year create state tax complexity that outweighs benefits?
  • Have you modeled the Section 481 adjustment and short‑period tax liability?

If most answers favor alignment and the financial benefit exceeds compliance cost, proceed with professional help.

Related topics and further reading

Authoritative sources cited:

Professional disclaimer
This article is educational and does not replace personalized tax advice. Changing a tax year has technical and tax accounting effects that usually require a CPA or tax attorney to model. Consult a licensed tax professional before submitting Form 1128 or altering your tax year.

If you’d like, I can prepare a short checklist you can run with your CPA (timing, documents, and calculations) to evaluate whether a fiscal year change is worthwhile for your business.