A tax year is a 12-month period for which a taxpayer calculates their income and expenses for income tax purposes. The most common type of tax year is the financial year, which runs from July 1 to June 30. However, taxpayers can also choose to use a fiscal year, which is any 12-month period that does not end on December 31.
What is a Normal Tax Year?
A normal tax year is a tax year that is the same length as the financial year. In other words, a normal tax year runs from July 1 to June 30. Most taxpayers use a normal tax year.
What is a Special Tax Year?
A special tax year is a tax year that is not the same length as the calendar year. There are a number of reasons why a taxpayer might use a special tax year, such as:
- The taxpayer’s business has a natural business year that does not end on June 30.
- The taxpayer is a farmer or fisherman.
- The taxpayer is a partner in a partnership that uses a calander year.
What is a Transitional Tax Year?
A transitional tax year is a tax year that is used to bridge the gap between a normal tax year and a special tax year. For example, if a taxpayer changes from a normal tax year to a fiscal year, they will have a transitional tax year that covers the period from the end of their normal tax year to the beginning of their new calendar year.
What are the Benefits of Using a Special Tax Year?
There are a number of benefits to using a special tax year, such as:
- It can help taxpayers to match their income and expenses more closely.
- It can help taxpayers to defer income taxes.
- It can help taxpayers to avoid the alternative minimum tax.
What are the Drawbacks of Using a Special Tax Year?
There are also a number of drawbacks to using a special tax year, such as:
- It can be more complicated to file taxes.
- The taxpayer may have to pay estimated taxes.
- The taxpayer may be subject to penalties.