Legal Question in Business Law in California

Re: Franchise Tax & Free Year

I do not handle tax matters. See tax attorney or your accountant.

Re: Franchise Tax & Free Year

Thank you for your inquiry. There is no reason why you, as a small business owner cannot select a fiscal year different from the calendar year.

If you should have any other questions or concerns, please do not hesitate to contact me directly at 619.233.0900.

Sincerely,

Re: Franchise Tax & Free Year

Indeed, there is no reason why a small business cannot adopt a fiscal year of its own choosing. However, there is a good reason (or two) why many do not. The first good reason is that many small corporations elect to be "S" corporations for tax purposes, and the IRS discourages non-calendar-year fiscal years for "S" corporations. Take a look at the back (Part 2) of IRS Form 2553, the "S" application form. You'll see that years ending other than 12/31 are tough to justify to the IRS for most applicants. Of course, if you don't want to be an "S" corporation, these rules don't concern you.

The other reason is that a corporate fiscal year ending 12/31 is in tune with the way most of the business (and personal) financial world operates. Your financial reports will be easier to understand. Your personal tax reporting will be easier.

I believe it is possible to incorporate late in the year and avoid taxes on that stub-end year IF you do no business -- this is to avoid a January 1 logjam at the Secretary of State's office. You could ask about this. However, if an $800 tax payment is a decisive factor for you, perhaps your business is not ready for incorporation. There are many other costs and responsibilities in running a corporation in addition to payment of franchise tax.