Summertime Fiscal Year Transitions
Happy New Year in the summer? For some churches and other nonprofit organizations, this is a sensible statement.
Most nonprofit organizations decide to follow the calendar year as their tax year (or “fiscal year”) when they are formed. Upon incorporation, some states require disclosure of the month in which the organization’s fiscal year ends. This information is also requested when applying for federal tax-exempt status. Because of its simplicity, organizations often opt to follow the normal January through December calendar year for their fiscal year.
Following the calendar year can create budgeting complexities, however, for organizations that rely heavily on charitable donations for income. Individual donors are often most likely to give substantial donations near the end of the calendar year (in or around December) in order to ensure that they capture the tax advantages of their donations within the calendar taxation year. If an organization also ends its fiscal year at the end of December, and that entity counts on December as its largest income month of the year, then the organization may find it challenging to make mid-year budgeting adjustments.
For example, if a church expects to receive twenty-five percent of its annual income in December, but plans to spend its budget on a more balanced monthly schedule, then an unexpected shortfall of income in December may leave the organization with a year-end deficit that it cannot recover from. Of course, the opposite may also prove true if December income exceeds expectations.
Many organizations have identified a solution to this budgeting challenge: they change the ending date of their fiscal year. Under one approach, the fiscal year is set to end on June 30 of each year, with the following fiscal year beginning on July 1. This fiscal year of July through June allows the entity to incur its largest income season right in the middle of its budgetary cycle, instead of at the end. Accordingly, if December income is significantly above or below the budgeted figure, there is still time to adjust spending accordingly well before the fiscal year ends on June 30.
Other organizations prefer to use a fiscal year that matches their programming cycle, which often reboots in the fall, near the beginning of each school year. In such situations, the organization’s fiscal year may begin on September 1 and run through the end of the following August, or begin on October 1 and run through the end of the following September. Not only does this approach keep the largest income month within the heart of the fiscal year, but it also begins at the time when spending patterns are most likely to be adjusted each year.
In order to switch fiscal years, board or membership approval will likely be required. The organization may need to run one extended, or shortened, special fiscal year in order to accomplish the switchover. Further, it may be necessary to inform state or federal agencies that the fiscal year-end date has changed.
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369
Tel: (888) 421-0101
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com