For a variety of reasons, nonprofit organizations occasionally change their fiscal year. The timing of the change, and providing notice to the IRS of the change, is important. In this post, we will walk you through what a fiscal year is and how you can go about changing your fiscal year.
Every nonprofit organization must have a fiscal year.
A fiscal year is your annual accounting period. Many organizations use a calendar year, January 1 – December 31, as their accounting period or fiscal year. Using the calendar year is simple, and it corresponds to the period used by the IRS to calculate personal income taxes. There are many reasons, however, that a different accounting period or fiscal year may be used. For example, if a nonprofit organization receives most of its funding from the federal government, the organization may want to use September 1 – August 31 as its fiscal year. This is because the federal government operates on this schedule. All fiscal years must be twelve (12) months long and start on the first day of a month, and end of the last day of the twelfth month.
Nonprofit organizations may change their fiscal years.
If you don’t know the fiscal year the IRS has on record for your organization, it can be found by looking your organization up using the IRS Tax Exempt Organization Search database. Search all databases by your organization’s EIN (employer identification number) or name. Then pull up the most recently filed IRS 990-series return and note the fiscal year listed.
Taking this step is important to make sure that the IRS receives your organization’s Form 990-series annual tax return when the IRS expects it. Failure to file the 990 on-time for three consecutive years results in revocation of your tax-exempt status. The IRS records, and not what you may find in your organization’s internal records, is critical.
Next, if you decide to change the organization’s fiscal year, we recommend making the change to coordinate with the end of your current fiscal year. This makes the change “cleaner” for both the IRS and your accounting records. So, for example, if your organization is currently following a calendar fiscal year, and wants to change its fiscal year to September 1 – August 31, we recommend that you make the change effective on January 1 of a given year. This will result in a “short year” the first year after the change of January 1 – August 31. The next accounting year will then begin September 1 and end August 31. A diagram may help here.
EXAMPLE OF ACCOUNTING PERIODS FOR A FISCAL YEAR CHANGE
|CURRENT FISCAL YEAR||YEAR 1 AFTER CHANGE (the “short year”)||YEAR 2 AFTER CHANGE|
|January 1, 2021 - December 31, 2021||January 1, 2022 – August 31, 2022||September 1, 2022 – August 31, 2023|
Notify the IRS of the change.
There are several ways to notify the IRS that your organization is changing its fiscal year. We recommend that you notify the IRS both on your Form 990-series tax return, and by mailing or faxing a written notice. Also make sure you keep copies of the notices sent to the IRS, and send the notices by return receipt or other traceable methods. Mail sent to the IRS tends to get lost sometimes.
First, you may notify the IRS of a change in your organization’s fiscal year by writing “Change in Accounting Period” in big bold letters on the top of the first IRS Form 990 you file after the change. In our example, you would write this notice on the short year return that the organization files for the period January 1, 2022-August 31, 2022.
In addition to writing this notice on the first IRS Form 990 following the change in fiscal year, we recommend that you send a written notice, either mailed or faxed, to the IRS. Our DIY guide on changing your fiscal year provides specific details and a form that you may use.
Finally, if you are a changing your organization’s fiscal year for a second time within a ten-year period, you need to file IRS Form 1128, Application to Adopt, Change, or Retain a Tax Year.
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