As the clock struck 12:01 this morning, many nonprofits began a new fiscal tax year. The fiscal tax year is a 12-month period designated by each organization for the use of the nonprofit funding. [1] Although nonprofit leaders can tailor the fiscal year to meet their organizations unique needs, most often June 30th is designated as the end of the fiscal tax year. Today, as July 1, 2021 began the start of a brand, new year. No doubt that this new year brings mixed blessings, challenges and many lessons. If this past year has taught us anything, one important lesson is that nonprofits need adaptive capacity. [2] Peter York, Senior Vice President and Director of Research, TCC group noted that a key to sustainability is adaptability. Accounting and financial experts Thompson and Greene shared that one way that nonprofits can strategically achieve adaptive capacity and create positive outcomes is to establish their financial record keeping according to a fiscal tax year, versus a calendar tax year. “Many business owners use a calendar year as their company’s tax year. It’s intuitive and aligns with most owners’ personal returns, making it about as simple as anything involving taxes can be. But for businesses whose primary operating season doesn’t fall neatly within a single calendar year, choosing a fiscal year end can make more sense” [3].
If you are one of many individuals who is forming a post COVID nonprofit organization, or who serve a nonprofit organization which operates on a calendar tax year, here’s three reasons why adopting a fiscal tax year may work better for your organization:
- Typically, the calendar year end months of November and December are filled with tasks. Some include year-end or holiday events, year-end donor appeals, donor acknowledgments… According to Sandhu, a fellow nonprofit treasurer, adopting a fiscal year end of June 30, can provide financial clarity and minimize errors because the nonprofit’s staff is not additionally juggling or fine-tuning budgets, funding plans, preparations for annual reports, meetings and more. [4]
- The yearly IRS tax filing deadlines for nonprofits is five months after the end of its fiscal year. [5],[6]. A June 30th fiscal tax year-end falls one month later than individual tax return deadlines, and other business filing requirements. The June 30th date also allows the organization’s accounting staff, the necessary time to process donations separately from their responsibility to prepare tax filings, and to prepare budgets well in advance of the year end funding deadline. Mid calendar year also affords ample time for financial audits during the summer months when the pace of programs and services may be slower. [7].
- Your board has more time for thoughtful review of the calendar year end outcome, generative discussions regarding organizational status, upcoming budgets, and to address funding needs and plans, and onboard new members due to yearly leadership transitions. [8]
Is your nonprofit already operating on a calendar year versus a fiscal year? No worries! You can change course as follows:
- Discuss the impacts of switching from a calendar year to a fiscal year with your accounting staff.
- Review the organization’s by-laws and if needed, amend your bylaws to reflect the new fiscal year as, ex. June 30th or other.
- Subsequent 990 tax filings must reflect this change in the organization’s fiscal tax year. Complete and file a Form 1128 with the Internal Revenue Service to adopt or change your tax year. [9]
With the 2021-2022 fiscal year upon us, we here at KGA Nonprofit Consulting, LLC wish you and your organization all the best for a productive, and fruitful year! As always, we stand ready to serve your capacity building and fund development needs.
References:
[1] IRS.Gov (n.d.). Form 990 frequently asked questions. [pdf]. Retrieved July 1, 2021 from: https://www.irs.gov/charities-non-profits/exempt-organizations-annual-reporting-requirements-filing-procedures-tax-year
[2] York, P. (n.d.). The sustainability formula. How nonprofit organizations can thrive in the emerging economy. Retrieved July 1, 2021 from: https://s3.amazonaws.com/rdcms-pta/files/production/public/Form%20990%20Frequently%20Asked%20Questions.pdf https://www.issuelab.org/resources/31526/31526.pdf
[3] Thompson & Greene (2018). Choosing between a calendar and a fiscal tax year. [blog]. Retrieved July1, 2020 from: https://www.tgccpa.com/2018/09/choosing-between-a-calendar-year-and-a-fiscal-year/
[4] Sandhu, T. (2017). Choosing a fiscal year. A custom-tailored fiscal year can improve the clarity and timeliness of your accounting information. Nonprofit World, 35(4). Retrieved June 30, 2021 from: https://www.snpo.org/redir/articles.php?id=2252
[5] IRS.Gov. (2021). Return due dates for exempt organizations: Annual return. Retrieved June 30, 2021 from: https://www.irs.gov/charities-non-profits/return-due-dates-for-exempt-organizations-annual-return
[6] Amazon Naws (2021). Form 990 Frequently asked questions. Retrieved June 30, 2021 from: https://s3.amazonaws.com/rdcms-pta/files/production/public/Form%20990%20Frequently%20Asked%20Questions.pdf
[7] Sandhu, T. (2017). Choosing a fiscal year. A custom-tailored fiscal year can improve the clarity and timeliness of your accounting information. Nonprofit World, 35(4). Retrieved June 30, 2021 from: https://www.snpo.org/redir/articles.php?id=2252
[8] Pew Trusts.Org. (2007) Governance as leadership: Reframing the work of the nonprofit board. Governance as Leadership: Reframing the Work of the Nonprofit Board [pdf]. Retrieved July 1, 2021 from: https://www.pewtrusts.org/~/media/legacy/uploadedfiles/wwwpewtrustsorg/reports/pew_fund_for_hhs_in_phila/governance20as20leadership20summary20finalpdf.pdf
[9]. IRS.Gov (2021). About form 1128, Application to adopt, change or retain a tax year. Retrieved July 1, 2020 from: https://www.irs.gov/forms-pubs/about-form-1128
About the Author:
Kristin A. Garrison, Founder & Principal, KGA Nonprofit Consulting, LLC, is a woman who genuinely believes in the goodness of others, and the passion and power of people to address societal needs through nonprofit initiatives. Throughout her life Kristin has committed herself to helping others as a dedicated nonprofit volunteer, serving a myriad of social initiatives. Through her work via KGA Nonprofit Consulting, LLC, Kristin shares her experience and knowledge of capacity building and fund development to help community initiatives to take root and succeed.