This might come as a surprise, but not every company marks their fiscal year end on December 31st. In fact, companies choose dates (often arbitrarily) across all twelve months of the year.
Usually, the fiscal year end is determined amidst the hustle and bustle of launching a business, without much consideration or strategy. But in truth, there are important factors that every business should consider before deciding on a fiscal year end.
A year-end date has to be determined within the first twelve months of incorporating. Here are the things you should contemplate before making that determination.
Availability of an accounting firm
Outsourced accounting resources are not necessarily available throughout the year, at the same rate.
Choosing a fiscal year end date that corresponds to an accounting firm’s slower time of year could result in more competitive pricing, greater attention and accessibility and faster turnaround.
At a minimum, it would make sense to avoid a fiscal year end during your accounting firm’s busy season. This will prove to be a source of frustration from year to year.
You might want to choose a fiscal year-end date that corresponds to your quietest time.
For instance, companies that deal with a lot of inventory might select a year-end date when inventory is lower and there is less to count. This can result in reduced costs and greater accuracy.
Or if your business does most of its selling over the holidays, you might want to close the books on December 31st when things have quieted down.
Tax Deferral Opportunities
Owner managed businesses can take advantage of tax deferral opportunities depending on when their fiscal year end occurs.
CRA requires individuals to report their personal income tax information using a December 31 year-end. They also allow businesses up to 179 days after the company’s year-end to pay out a management bonus.
This lag enables businesses to claim a tax deduction for a management bonus expense in one year, and if the year-end date is set late enough, the owner does not have to claim the income from the bonus until the following tax year.
The actual industry in which you operate can impact your decision as well.
The various business needs of your stakeholders should be thoroughly considered. For instance, if you are a not-for-profit organization that receives government funding, you might want to choose a fiscal year-end of March 31st, which is the same year-end of government agencies.
Make sure you take the time to thoroughly consider these different factors because it is not an easy process to change your fiscal year-end if you decide that the date is not working for you.
CRA requires that there be a legitimate business purpose for making such a change – it cannot be done on a whim.
For more help or feedback on choosing your fiscal year-end date, contact a Miller Bernstein representative or schedule a free consultation.