One of the important decisions nonprofit leaders need to make during the organizational stage is choosing a fiscal year that aligns with the organization’s mission and other factors. A fiscal year is a 12-month financial reporting period that determines when a nonprofit organization starts and ends its accounting cycle. When selecting a fiscal year, several factors should be considered, including funding sources, applicable tax requirements, and operational issues.
Understand the Tax Implications: Choosing a fiscal year may affect how the organization files tax returns (and pays taxes when applicable). For example, most nonprofits use the calendar year as their fiscal year, which means their annual Form 990 tax returns are due on May 15. However, if a nonprofit operates on a different fiscal year, it may need to adjust its accounting records and file tax returns sooner or later in the year. Nonprofit leaders should work with an accountant to help navigate the tax implications of choosing a fiscal year that’s different from the standard calendar year.
Align with Funding Cycles: Another factor to consider when selecting a fiscal year is an organization’s funding cycle. Nonprofits often receive grants or donations that are tied to a specific time of year. If a nonprofit relies on these sources of funding, it may want to choose a fiscal year that aligns with the timing of these grants or donations. This can help an organization plan its financial activities more effectively and maximize funding opportunities.
Sync with Operations: A nonprofit’s fiscal year should also align with its operations and budget cycles. For instance, if a nonprofit runs a seasonal program that only operates from June to September, it might make sense to choose a fiscal year that aligns with that timeframe. Similarly, if an organization has a major fundraising event in December, it could choose a fiscal year that ends in November to ensure that all the income and expenses associated with that event are accounted for in the same fiscal year.
Consider Reporting Needs: Nonprofits often need to report their financial information to various stakeholders, such as donors, grantmakers, and government agencies. A nonprofit’s fiscal year should allow it to gather and report financial data consistently and accurately. For instance, if an organization needs to report its annual financial statements to a grantmaker by a certain deadline, it will want to choose a fiscal year that provides enough time to prepare and review those statements before the deadline.
Adopt a Long-Term View: Choosing a fiscal year is not a decision to be taken lightly, as it can have long-term consequences on a nonprofit’s finances and operations. Nonprofit leaders need to consider how its fiscal year will impact the organization’s short-term and long-term planning, budgeting, and reporting needs. Leaders may also want to revisit their fiscal year choice periodically to evaluate its effectiveness and make adjustments as needed.
Selecting a fiscal year for a nonprofit requires careful consideration of various factors, including tax implications, funding cycles, operations, reporting needs, and long-term goals. By choosing a fiscal year that aligns with the organization’s mission and objectives, nonprofits will be better positioned to manage finances, comply with legal requirements, and achieve desired impact. Remember, a nonprofit organization’s fiscal year is more than just a number—it’s a critical piece of the organization’s financial puzzle.