Introduction

Tax years and accounting periods set the timeframe for recognizing income, deducting expenses, and meeting filing deadlines. For most individual taxpayers the tax year matches the calendar year, but businesses can select a fiscal year that better aligns with their operating cycle. The choice affects quarterly estimated payments, year‑end planning, and how income shifts across reporting periods (IRS Pub. 538).

Why this matters

  • Compliance: Using the correct tax year ensures you file on time and apply the right forms and rates.
  • Tax planning: Timing income and deductions across tax years can change liability and eligibility for credits.
  • Financial reporting: Lenders, investors, and partners expect consistent accounting periods when evaluating performance.

How individuals typically report

Most individuals report on a calendar year (January 1–December 31) and file their federal return the following spring (see IRS individual filing guidance). Wages reported on Form W‑2 and most 1099s are issued on a calendar‑year basis, so matching your reporting period to the calendar year simplifies recordkeeping.

How businesses choose an accounting period

Businesses can use a calendar year or elect a fiscal year (any 12‑month period ending the last day of a month other than December). A fiscal year is often chosen to match seasonal sales, inventory cycles, or industry practices. Before adopting or changing a tax year, most entities must follow IRS rules — for example, corporations often file Form 1128 to request a change (IRS guidance on choosing a fiscal year and Form 1128).

Practical examples

  • Seasonal retailer: A retailer with heavy holiday sales might use a fiscal year ending January 31 so the holiday season is fully in one reporting period.
  • Freelancer: A contractor paid year‑round generally uses the calendar year and makes quarterly estimated tax payments tied to that schedule.

Common mistakes to avoid

  • Assuming you can change your tax year without permission. Changes often need IRS approval and can create overlap or short tax years.
  • Mixing reporting periods across returns. Keep a single accounting period per tax entity to avoid confusion and audit questions.
  • Ignoring state rules. Some states restrict tax‑year choices or require separate notifications.

Professional tips (from practice)

  • Match your tax year to your business cycle when possible; I’ve helped clients avoid artificial income spikes by switching to a fiscal year that captures full seasonal results.
  • Use year‑end checklists and reconcile accounts before closing a tax year to prevent missed deductions.
  • If you’re thinking about changing a tax year, consult a tax pro early — the timing of the request and transitional rules matter.

How to change a tax year

  • Small businesses and corporations usually file Form 1128 (Application to Adopt, Change, or Retain a Tax Year) or follow automatic change procedures described by the IRS. Individual changes are rare and typically require a valid business purpose and IRS approval (IRS Pub. 538; Form 1128 instructions).

Where to learn more (authoritative sources)

Related FinHelp articles

Disclaimer

This article is educational and does not replace personalized tax advice. Tax rules change; consult a qualified tax professional or the IRS for guidance specific to your situation.