When you create a company, you have the opportunity to determine when you would like the fiscal period to end. The general default for a person is to select December 31st as the year-end.
However, there are some other factors that you should consider when selecting a year-end date.
You have 365 days from the date of incorporation to select your year-end. And it is set once you file your first corporate tax return. But you can pick any day within that 365 day period to be your year-end.
One factor may be based on how your revenues are earned during a year. Ideally, you should be targeting your year-end to coincide with the end of a busy period where there is a bit of “calm”. This will allow you to gather up all of the paperwork for the year and to have the time to reflect on the activities in the year to make sure that everything has been captured.
You don’t want to have a drawn out year-end close process. Our memories can sometimes deceive us and the longer period of time between when you close a fiscal year for your company and when the actual fiscal year-end occurs, facts can be forgotten. Therefore, it is important to close off the books and records as soon as possible. This will also help you plan better for the upcoming year.
Some questions for you to consider:
- Is your business seasonal?
- For example: Is you business busiest during a school year? (September – June)
- Are the defined cycles to your business?
- Busy Spring & Summer, but slow Fall & Winter?
- Is your business tied to a government payment schedule or a government grant where you need to provide reporting to them based on their fiscal year-end?
- Most governments have a March year-end
- Is your busiest time of business in December?
If you are a retail based business or a restaurant, the industry standard is to have a January or February year-end. This allows your business to have the time to incorporate your most profitable periods into your business.
If your business earns most of its revenue supporting school-aged children during the in-session periods, then maybe a June/July year-end is best for you.
But what is a good year-end if your business is fairly consistent month over month, or there isn’t any consistency to revenues? Then you may opt for a month that suits your lifestyle. If you like to go away in January, maybe select a year-end that isn’t December or January. If you like to have your summers off, my suggestion would be to avoid the months from May – July as your fiscal year-end.
An additional point to consider when picking a fiscal year-end is a potential tax planning opportunity. If your business has an unusual year where there is higher than normal revenues, you have the opportunity to spread out how to withdraw that money for your personal purposes over more than one year.
So before you pick December 31st as your fiscal year-end, make sure you take the time to look at your business plan to see if there is another month that would be preferable. Taxes and accounting are hard enough to keep on top of when you are running your own business. So be kind to yourself and make sure that you are selecting the year-end that works best for you.
If you’d like to brainstorm this with someone, please feel free to reach out to us at [email protected].