Why should I consider changing my fiscal year-end?
Organizations may choose to transition from December 31 to fiscal year-end for many reasons, but one primary motive is the budget challenge. Many organizations with individual-driven contributions receive a majority of revenues in the fourth quarter of the calendar year. This leaves many of these nonprofit organizations waiting for generous donors to contribute last minute for personal tax reasons.
Three Main Objectives to Consider
- Budgeting. Many organizations are shifting from a traditional June 30 or December 31 year-end to better enable themselves to monitor budget to actual by placing the largest revenue-generating quarter as the first in the fiscal year. Your development team likely will thank you, but your administrative team won’t be pleased.
- Reporting. One of the more significant administrative burdens has been reporting actual results to budget and providing comparative financials to funders, creditors and other readers. Organizations have noted that, most of the time, funders didn’t have significant issues with reviewing an organization’s financials in the year of change. In case of questions, organizations had internal financials available for providing comparative information.
- Goal Tracking. Other burdens have included tracking programmatic goals year over year in the transition year and objectives of the board of directors’ meetings, such as budget approval and review of audited financial statements and tax returns. These need to change to coincide with the new fiscal year.
The NonProfit Times blog cites Thomas Wolf’s book, Managing a Nonprofit Organization, by stating great care should be taken in choosing a year-end date. In addition, the fiscal year-end should coincide with the organization’s programs, and program revenues shouldn’t cross fiscal years. Another rule of thumb is that a fiscal year should end before a period of inactivity. The fiscal year-end also may be chosen to coincide with a primary funder’s fiscal year-end and resulting reporting requirements. For example, if a major portion of an organization’s support is from the state government, the nonprofit may select the same fiscal year-end as the state to simplify reporting on state grants.
How do I know the best time for my fiscal year-end?
The IRS states a fiscal year should coincide with the organization’s natural operating cycle. To figure out your optimal fiscal year dates, ask yourself these questions:
- What’s your organization’s most significant quarter for revenue generation?
- Do you rely mostly on individual giving, traditionally taking place near the December 31 year-end?
- Are you an educational institution where a significant portion of tuition is generated in the fall?
- Are revenues mostly generated in the summer months, e.g., zoos?
Sounds great! I’ve determined the best fiscal year-end. What do I do now?
If the organization changes its accounting period, it must file a Form 990 for the short period resulting from the change and write “Change of Accounting Period” at the top of this short-period return.
If the organization has previously changed its annual accounting period at any time within the 10-calendar-year period that includes the beginning of the short period resulting from the current change in accounting period, and it had a Form 990 series filing requirement or income tax return filing requirement at any time during that 10-year period, it also must file a Form 1128, Application To Adopt, Change, or Retain a Tax Year, with the short-period return. See Rev. Proc. 85-58, 1985-2 C.B. 740.
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