Not-for-profits may choose their fiscal year-ends for IRS purposes. Individuals and many business entities (such as partnerships, sole proprietorships, and S corporations, with limited exceptions) are required to use calendar year-ends for their tax filings. This flexibility available to not-for-profits may provide certain advantages, so it is important for each organization to weigh the options before making a decision. This article discusses key considerations for NFPs when choosing a year-end date and how to make a chosen year-end date change.
What to consider when choosing a year-end
A calendar year-end is often the default choice for newly created organizations, but careful assessment is warranted as this may not necessarily be the best choice for every not-for-profit. A thoughtfully chosen year-end can produce more meaningful financial statements and ease reporting requirements. Consider the following factors:
Programmatic timing. Choose a year-end that keeps your key program activities in the same fiscal year. Consider, for example, a not-for-profit that holds an annual, late-summer festival. If they promote the festival in the spring and begin accepting applications and fees for the following summer’s festival in November, it might make sense to have an October 31 year-end. That would allow the application fees received in November to be recorded in the same fiscal year as the event is held. It also would give staff a couple of months after the event to pay bills, close out the books, and prepare for the financial statement audit if they have one. This will reduce the burden on accounting staff, lessen the likelihood of errors, and produce more meaningful financial statements.
Year-end of major funder(s). A not-for-profit organization that receives predominantly all its funding from a government entity, for example, may want to align its fiscal year-end with that of the government funder. Having a year-end that coincides with the timing of awards would simplify the not-for-profit’s grant reporting.
Debt covenants. The organization’s operating cycle and its impact on debt covenant calculations is another important consideration for organizations that have significant debt covenants. These NFPs should ensure that their year-end choice enables them to meet these lender-imposed requirements.
Alignment with other reporting. Most third-party vendors (for example, investment managers and payroll services) operate on a calendar-year basis, presenting year-end reporting on December 31. Having a non-calendar year-end could mean that year-to-date reporting information from third parties won’t match up as nicely, but obtaining reporting that meets a non-calendar year end is possible.
How does a not-for-profit change its year-end?
To change your not-for-profit’s year-end, complete your next Form 990 using the new fiscal year-end and write “change of accounting period” at the top. The return will have to be for a “short” year because the IRS does not allow a return to cover more than 12 months. To date, “short” year returns have had to be paper-filed but with the new mandatory e-filing regulations, the IRS system may adjust to allow “short” year returns to be e-filed.
There are, however, a few important items to think about:
Form 1128. If the organization changed its year-end within the past 10 years, then it must file Form 1128 with the IRS to change it again.
Organizational documents. Sometimes a not-for-profit’s fiscal year is established in its bylaws. The organization’s board of directors should approve the change and amend the bylaws, if necessary.
Audited financial statements. For organizations that get audited financial statements, changing the fiscal year-end will affect the comparability of results in the year of the change, and single-year statements may need to be presented rather than comparative statements. A year-end change also will affect audit billing in the year of the change—accelerating it if the NFP chooses to have an audit for the “short” year and delaying it if the NFP chooses to extend the audit period.
Regulatory reporting requirements. State charitable registrations may be affected by selecting an alternate year-end. Having a partial fiscal year in the year of the change may cause the NFP’s revenue to fall below the required revenue thresholds for an audit or review. Many organizations that have changed their year-end have performed the same state filings with the “short” period as they had with their prior period. Before you make your decision about your audit period, be sure to contact the agency in charge of monitoring charities and clarify what is expected for the “short” period.
Whether new or existing, an NFP’s choice of reporting period warrants careful consideration.