Published December 1999
Starting a Business: Choosing a Year-End
Have you started a new business? One of the decisions you will have to make is the setting the year-end. All businesses have a year-end. Many are December 31st, but not always. What year-end should your business have?The year-end you choose for a business depends on the legal form of the business and the nature of the business.
1. Sole Proprietorship or Partnership.
In the past an unincorporated business could choose any year-end. More often than not a January year-end was picked because it provided the best tax deferral. (Tax planning means first an absolute reduction in taxes and second deferral of taxes). The Liberal government changed the rules in 1995. All new sole proprietorships and partnerships must report their income on a calendar basis. This means using a December year-end for tax reporting purposes. You could have a non-December year-end for accounting purposes; however, the aggravation of having two sets of books (one for management and second for tax purposes) means it rarely makes sense to do so. Therefore, if you are starting a sole proprietorship or partnership, you'll have a December year-end. It will simplify your life.
A corporation can have any date as its year-end, but it must use the same date for each year thereafter. Once you pick a year-end you pretty much have to live with it going forward. If you want to change the year-end you have to get permission from Revenue Canada. It is not automatic that they will grant the change in year-end.
In the year of incorporation, you must choose the first year-end. It is any date within 12 months of the incorporation. Most companies have year-ends that fall on the last date of a month.
Choosing a year-end: tax factors
For tax reasons you would choose a July or August year-end because you can achieve tax deferral on paying a bonus out of the corporation in the following calendar year (e.g., bonus expensed in July 2007 year-end in corporation, but personally taxed in 2008 when paid in January 2008).
Choosing a year-end: business factors
For business reasons you would choose a year-end when your inventory levels are at their lowest. You have to do an inventory count at year-end so if the level is at its lowest, the count will be easier. In the case of service companies, inventory count means calculating their work-in-progress (often referred to as WIP). Further, ending inventory factors into the calculation of net income. A lower ending inventory means lower taxable income and you therefore defer taxes.
What's inventory? For retailers, it is the goods on their shelves. For manufacturers, it is the raw material, partial completed products and finished goods ready for shipment. For service companies like a consultant, it is work-in progress - expenses incurred on jobs that are not completed and therefore not billed.
Choosing a year-end: workload factors
For accounting reasons, most accountants are extremely busy in January to April. If you have a December year-end you will be dealing with a busy accountant. If you deal with an accountant when they are not as busy (e.g., having a July year-end) you'll get better attention, quicker service and possibly better work.
The Bottom Line
Choosing a year-end is an individual choice that will stay with your business throughout its existence. When choosing your year-end remember to think forward to what your business might look like in 5 or 10 years time, and make the best choice for your specific situation based on the factors we discussed.
Categories: starting a business, regulations
James Piper is a member of the Institute of Chartered Accountants of Ontario (CA) and a member of the Society of Management Accountants of Ontario (CMA). He has been in public accounting since 1988 after obtaining his Honours Bachelor of Business Administration from Wilfrid Laurier University in Waterloo. In 1993, he completed the 2 year CICA In-Depth Income Tax Course, a comprehensive training program for income tax specialists. His firm provides professional services to businesses in the areas of accounting, tax and business and financial management. Visit his web site http://jamespipercpaca.wordpress.com/ or contact him by email James@JamesPiper.com.