Have you found yourself asking why your organization operates on its current year-end? Whether it is a calendar year or fiscal year, organizations may benefit from examining whether the current year-end is still appropriate. Considerations may include:
If a large portion of your revenue is coming in right before year-end, it may make budgeting and year-end responsibilities more difficult. Changing the year-end to align with the organization’s operations may provide more flexibility and easier comparison to budget. For example, December 31 is right around the corner and many organizations receive substantial contributions in the last quarter of the year. It may make sense for those organizations to consider a June 30 or September 30 year-end.
If your organization is making or receiving grants on a specified schedule, this timing should be part of the conversation. If you receive significant grant revenue that has fiscal year-end timing and you operate on a calendar year-end, consider if there is benefit to align with the grant cycle to aid in the budget and reporting process.
Users of Your Financial Information
Do you have third parties requesting your audit and tax return by a specific date during the year? Consider whether a change in year-end would make it easier to meet those timing restrictions. Early communication with third party users is beneficial to gain a full understanding of potential implications that may arise with a change. Financial institutions, grantors, and regulators are some of the parties to reach out to. You should also contact your accounting firm to discuss timing and availability for fieldwork.
Audit Reports and Tax Filings
A change in year-end has an impact on the presentation of your financial information, from both an audit and tax standpoint. An organization needs to consider whether they would complete two separate audits to address the change: one for the 12-month period and one for the short-period, or whether they would have one audit spanning a 12+ month period, for example 18 months. In addition, you also must consider the impact on presenting comparative information. Regardless of what the organization chooses to do from an audit standpoint, a tax return cannot be filed for a period longer than 12 months. Therefore, a short period return will need to be filed and financial information will be needed even if a longer time frame is used for audit purposes. State solicitation requirements may also impact the decision for the audit report. State solicitation reports may require the attachment of audited financial statements which may require an organization to obtain two separate audits due to timing requirements. As discussed above, third party users may also require two separate audits because of timing.
Changing your year end is a relatively easy process. The year end will need to be approved by your board and likely will require an amendment to your organization’s bylaws (or Articles of Incorporation). If your organization has not changed its year-end in the last ten years, there is no special form to request the change from the IRS. Instead, organizations need to file a short period tax return and indicate “Change of Accounting Period” on the top of page one. If there has been a change in the last ten years, the organization must file Form 1128 – Application To Adopt, Change, or Retain a Tax Year, with the short period tax filing. If your organization files Form 990-N, you must report the change on Form 990, Form 990-EZ, Form 1128, or by sending a letter to the IRS.