Generally, it is required for sole proprietorships and partnerships to use a calendar year-end. In contrast, corporations, other than perhaps some professional corporations, are able to select the month end which best suits their business.
Which Month to Choose
The selection of a year-end involves several considerations. One important factor is the ease with which data is accumulated. For this purpose, most companies prefer to use a quarter end as the last day of the fiscal year (e.g. March 31, June 30, September 30, or December 31). Many companies not using a quarter end date find that it complicates several government filings, and can be confusing to shareholders and others when disclosing quarterly data. Partnerships and sole proprietorships generally will choose a December 31 year-end due to fewer complications and less extensive work.
A second consideration involves the nature and seasonal fluctuations of the business. As a general rule, the year-end causes a disruption to the normal course of business, especially if a physical inventory is required. It is usually better to have this disruption occur during the off-season. Also, since the periods just before and just after year-end often involve an additional time commitment by the key officers, a year-end that does not conflict with normal vacation schedules is preferable. For these reasons, a calendar year-end may not be selected. There are also tax reasons to select a year-end other than December 31. If the company has, for example, a July 31 year-end, it is possible for the corporation to declare bonuses payable to the owner in July and obtain a tax deduction. The bonus must be paid within six months of the year-end and if deferred to January of the following year, a deferral of personal income tax is achieved.
Proper planning in selecting a year-end can also defer the payment of taxes at the corporate level. Suppose the company incorporated in July and operated at break-even through the next April, but expected May and June to be big income months. By selecting a March or April year-end, the company can delay for ten months the payment of taxes on the May and June income. Since cash is often scarce for a start-up company, this deferral can be of significant benefit.