Tax Year

Tax Year Fiscal Year Income Tax Accounting Period Financial Reporting IRS Income Tax Return
A tax year is a period used for calculating annual income tax returns. It is commonly a calendar year but can also be a fiscal year, which is any consecutive 12-month period that does not necessarily start on January 1st.
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What is a Tax Year?

A tax year is the 12-month period a taxpayer uses for determining their income and filing taxes. There are two primary types of tax years: the calendar year and the fiscal year.

  1. Calendar Year: This runs from January 1 to December 31. Most individual taxpayers and businesses use the calendar year for their tax filings.
  2. Fiscal Year: Any 12-month period that ends on the last day of any month other than December. For example, a fiscal year may run from April 1 to March 31 of the following year.

Examples

Example 1: Individual Taxpayer
John, an employee, uses a calendar tax year. His income earned from January 1, 2023, to December 31, 2023, will be reported on his 2023 tax return filed in 2024.

Example 2: Business with Fiscal Year
XYZ Corporation opts for a fiscal year running from July 1 to June 30. Thus, their fiscal year 2023 refers to the income and expenses from July 1, 2022, to June 30, 2023.

Frequently Asked Questions

Q1: Must all businesses use a calendar year for their tax year?
A1: No, businesses can elect to use a fiscal year instead of a calendar year, provided they maintain consistent and accurate accounting records.

Q2: Can a taxpayer change their tax year?
A2: Yes, but changing a tax year typically requires permission from the Internal Revenue Service (IRS), and it can involve specific forms and potentially complex conditions.

Fiscal Year: Defines any consecutive 12-month period for accounting purposes that does not start on January 1.

Tax Return: A form filed with a tax authority that reports income, expenses, and other pertinent tax information.

Gross Income: Total income earned before any deductions or taxes are applied.

Adjusted Gross Income (AGI): Gross income minus specific adjustments, often used as a benchmark for determining eligibility for tax deductions and credits.

Tax Deduction: Reductions from taxable income to decrease total tax liability.

Online Resources

Suggested Books for Further Studies

  1. “Tax Savvy for Small Business” by Frederick W. Daily
  2. “J.K. Lasser’s Your Income Tax” by J.K. Lasser Institute
  3. “Income Tax Fundamentals” by Gerald E. Whittenburg and Martha Altus-Buller

Accounting Basics: Tax Year Fundamentals Quiz

### How long is a tax year? - [ ] 6 months - [x] 12 months - [ ] 18 months - [ ] 24 months > **Explanation:** A tax year is a 12-month period used to calculate annual income tax returns. ### Which of the following is true about a fiscal year? - [ ] It must begin on January 1st. - [ ] It is always the same as a calendar year. - [x] It can begin on the first day of any month. - [ ] It must end on December 31st. > **Explanation:** A fiscal year can start on the first day of any month and run for 12 months, ending on the last day of the preceding month in the following year. ### Can individual taxpayers choose to have a fiscal year for their tax returns? - [ ] Yes, without any restrictions. - [ ] No, individuals must always use the calendar year. - [x] Rarely, but it usually requires specific IRS approval. - [ ] Only if they are contractors or freelancers. > **Explanation:** Individual taxpayers generally use the calendar year, but exceptions exist and changing the tax year typically requires IRS approval. ### What period does a calendar tax year cover? - [ ] July 1 – June 30 - [ ] October 1 – September 30 - [x] January 1 – December 31 - [ ] March 1 – February 28/29 > **Explanation:** A calendar year tax period spans from January 1 to December 31 of the same year. ### Can businesses change their tax year from a calendar to a fiscal year? - [x] Yes, but they need IRS approval. - [ ] Yes, without any restrictions. - [ ] No, once chosen it cannot be changed. - [ ] Only if they have been in operation for more than 5 years. > **Explanation:** Businesses can change their tax year from a calendar year to a fiscal year, but they must obtain permission from the IRS. ### Who establishes the tax regulations for maintaining a fiscal year? - [ ] State governments - [ ] Local municipalities - [ ] Business owners - [x] The IRS > **Explanation:** The IRS establishes regulations for setting up and maintaining a fiscal year for tax purposes. ### What must part of a tax year include to be considered valid? - [ ] At least 50% of total business revenue - [x] A full 12-month period - [ ] At least 6 months with recorded income - [ ] Two full quarters recorded > **Explanation:** A tax year must include a full 12-month period to be considered valid. ### In which scenario is using a fiscal year beneficial for businesses? - [x] When their revenue cycle does not match the calendar year. - [ ] When they want to avoid the IRS tracking. - [ ] When they operate in industries regulated only in certain months. - [ ] When they are exempt from all tax laws. > **Explanation:** Using a fiscal year can align better with a business's revenue cycle, especially if it doesn't naturally conclude at the end of the calendar year. ### What form must be filed to request a change in tax year with the IRS? - [x] Form 1128 - [ ] Form 1040 - [ ] Form 990 - [ ] Form 7004 > **Explanation:** To request a change in the tax year, businesses usually need to file Form 1128 with the IRS. ### For accounting purposes, which term does the following refer to: a period running from October 1 to September 30? - [ ] A tax year - [x] A fiscal year - [ ] A calendar year - [ ] A tax quarter > **Explanation:** A period running from October 1 to September 30 is an example of a fiscal year.

Thank you for learning about the concept of a tax year with our comprehensive guide and quiz. Keep pushing forward in your accounting education!

Tuesday, August 6, 2024
Tax-Deductible
Tax Wedge
Financial Period January 1, 1
Total Income January 1, 1
Year January 1, 1
Year-End January 1, 1
Accounting Period January 1, 1
Accrued Income (Accrued Revenue) January 1, 1
Accrued Taxes January 1, 1
Adjusted Gross Income (AGI) January 1, 1
Assessment of Deficiency January 1, 1
Basis Period January 1, 1

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