Corporations – Making Tax Year Designations

Death and taxes are those two things you can never escape. When forming a corporation, making your tax year designation is a fundamental step you need to take carefully.

Taxes are defined by something magical known as the fiscal year. It is a 365 day period that defines a business year for a business. With a sole proprietorship, the fiscal year is automatically the calendar year - from January 1st through December 31st. The same, obviously, goes for your personal tax returns.

Corporations run a bit different when it comes to tax year designations. In certain situations, you get to designate the fiscal year. Specifically, a traditional C corporation may designate its fiscal year as any 365 day period. For example, I might form a corporation and pick a fiscal year running from July 15th of one year to July 14th of the following one.

There are certainly some advantages to tweaking fiscal years with C corporations. Most businesses spend money like mad at the end of the calendar fiscal year, which can cause your books to get out of whack at the end of the year. A middle year designation avoids this and offers other leveraging opportunities.

So, what about an "S" corporation? The S corporation is tailored to small businesses and lets them pass through business finances to personal tax returns much like a partnership. Because of this tie in to the personal returns of shareholders, an "S" corporation is not allowed to designate a tax year other than the calendar year. Put another way, the year has to be January 1st through December 31st.

If you form a corporate entity, it is highly recommended that you hire a CPA to help handle the tax situation. Corporate tax law is entirely different than personal tax law. There is a lot of room to implement tax reduction strategies, but usually only if you take the necessary steps form the very outset of the corporate filing. In short, spending a bit of money on a CPA now can save you a ton of money down the road, so do it!

Richard A. Chapo writes about how to incorporate in California for SanDiegoBusinessLawFirm.com.