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8 Tips to Determine Your Not-for-Profit’s Year-End

Year-end planningNot-for-profits have a luxury that most other individuals and businesses do not. They’re allowed to select their fiscal year-ends for IRS purposes. Partnerships, sole proprietorships, S corporations and other legal structures, with limited exceptions, may not. These groups generally are required to use calendar year-ends for tax filings. Read on to find out what a not-for-profit should consider when choosing a year-end date.

How does a not-for-profit choose its year-end?

By default, many not-for-profits are organized with a calendar year-end, but not-for-profits should assess if this is the best choice. A thoughtfully chosen year-end may produce more meaningful financial statements, ease reporting requirements and even save the organization money. Before deciding on a year-end, organizations should consider the following factors:

  • Programmatic timing. Choose a year-end that aligns with your key program(s). For example, I had the opportunity to help a not-for-profit festival set up its financial records. It was a summer festival that took place in late July/early August. They held an annual event in April to promote the festival and in November began accepting applications and fees for the following summer’s festival. After reviewing their operating cycle, it made sense to select October 31 as their year-end. That year-end gave the organization a couple of months to pay its bills and close out the festival’s books. It also allowed the application fees received in November to be recorded in the same fiscal year the event was held.
  • Year-end of major funder. A not-for-profit organization that receives predominantly all of its funding from a government entity, for example, may want to align its fiscal year with the government’s. Having a year-end that coincides with the timing of awards would simplify the not-for-profit’s grant reporting.
  • Potential cost savings. The cost of tax and accounting services may be higher during peak periods when calendar-year-end reporting is being completed for most entities and individuals. Because they have the flexibility to choose an alternate fiscal year-end, not-for-profits may be able to obtain those services at a lower “off-peak” price, leaving more resources available for program-centric work.
  • Alignment with other reporting. Having a year-end other than December 31 will mean most year-to-date reporting information from third parties won’t match up as nicely. Investment statements and payroll reports, for example, are generally presented on a calendar-year basis.

How does a not-for-profit change its year-end?

Changing a year-end is quite simple. When the next Form 990 is completed, just prepare it using the new year-end. The return will have to be for a “short” year since the IRS does not allow a return to cover more than 12 months.

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.
  • For organizations that get audited financial statements, changing the fiscal year-end will affect the comparability of results in the year of the change. Note that a year-end change likely will accelerate audit billing in the year of the change, since the audit bill for the “new” year will be due 6-9 months after the preceding bill for the “old” year.
  • 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 put a not-for-profit under the required revenue thresholds for an audit or review. Be sure to contact the agency in charge of monitoring charities and clarify what is expected for its stub period.

Whether a not-for-profit is just starting up or has been around for many years, its choice of reporting period should be carefully considered.  

The AICPA’s Not-for-Profit Section provides a variety of Form 990 resources, including a comprehensive organizer and several checklists. You may also be interested in this list of common errors on the Form 990 series of returns.

Marc Kotsonas, CPA, Officer- Mahoney Ulbrich Christiansen Russ. Marc specializes in audit services for not-for-profit organizations. He is a member of the AICPA Not-for-Profit Section and has completed the Not-for-Profit Certificate II training program.

Year-end planning courtesy of Shutterstock.

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