Choosing your fiscal year and accounting method

This guide is for founders and new treasurers setting up a charity's books for the first time, and for anyone who has inherited books and isn't sure why the year ends in June. Two early choices shape almost everything your bookkeeper does: which 12 months your year covers, and when you count money as coming in or going out. After reading, you'll know how to choose, where the choice gets recorded, how to change it later, and what the IRS asks about it on your annual return.

Two choices, in plain words

• Your fiscal year (the IRS also calls it your accounting period or tax year) is the 12 months your books and annual IRS return cover.
• Your accounting method (or basis) is the rule for which year a payment or bill belongs to: when the money moves, or when it's earned or owed.

Neither choice changes how much money you have. Both change what your reports show, and when.

Choosing your fiscal year

The IRS allows a calendar year, January 1 to December 31, or a fiscal year, meaning 12 months ending on the last day of any other month (or a 52-53 week year) (Form SS-4 instructions). The Form 990 instructions say a fiscal year "should normally coincide with the natural operating cycle of the organization."

Questions that help you pick:

• When is your quiet season? Closing the books and preparing the annual return is easier in a slow month. A summer camp may not want its year to end in July.
• What year do your big funders use? If your main grants, a school district or a government contract run July to June, matching them makes reporting simpler.
• When does your board plan? The board approves a budget before each year starts. Pick a year-end that gives it time.
• Does it affect your deadline? Your annual return is due by the 15th day of the 5th month after your year ends (Form 990 instructions). A December year-end means May 15. A June year-end means November 15.

If nothing stands out, a calendar year is simplest. Payroll forms such as the W-2 already run on the calendar year, and most volunteers think in calendar years.

Where your fiscal year is recorded

Your year shows up in several places. They must all agree.

1. Your bylaws. Most bylaws include a fiscal year clause. Our bylaws template has one.
2. Form SS-4, the application for your EIN (employer identification number), asks for the "closing month of accounting year" on line 12.
3. Form 1023, your application for 501(c)(3) recognition, asks for the "month tax year ends." Its instructions tell you to check your bylaws for consistency with what you enter.
4. Your annual return. The heading of Form 990 or 990-EZ shows the dates your year began and ended.

If you find a mismatch, such as bylaws saying June while IRS records say December, sort it out before your next return is due. Ask an accountant whether you need to formally change your IRS year or simply amend your bylaws.

Changing your fiscal year later

Charities sometimes change their year, for example to match a major funder. According to the Form 990 instructions:

• You must file a Form 990 (or 990-EZ) for the short period, meaning the months between the end of your old year and the start of your new one. A short period is any accounting period of less than 12 months.
• On that return, you give the reason for the change, either "Form 1128 was approved" or "Revenue Procedure 85-58 rules apply."
• If you already changed your year within the 10 calendar years that include the start of the new short period, and you had a Form 990-series or income tax filing requirement during that time, you must also file Form 1128, Application To Adopt, Change, or Retain a Tax Year, with the short-period return.
• If you file the Form 990-N e-Postcard, you report the change on Form 990, Form 990-EZ or Form 1128, or by sending a letter to the IRS in Ogden, Utah.

Then update your bylaws by board vote and record it in your minutes. If you file reports with your state charity regulator, check whether it needs to know too.

Cash or accrual: the plain difference

IRS Publication 538 puts it simply:

• Cash method: you record income when you receive it and expenses when you pay them.
• Accrual method: you record income when you earn it, whenever payment arrives, and expenses when you incur them, whenever you pay.

A hypothetical example: in December, a foundation sends you a letter awarding a $10,000 grant, and the check arrives in February. Your printer sends a $500 bill in December, which you pay in January. If your year ends December 31:

Why most small charities start on cash

The cash method matches your bank statement, so it's easier for volunteers to keep and to check. Many small charities start here.

When accrual starts to make sense

Accrual gives a truer picture when timing gaps get large: multi-year grants, pledges paid over time, government contracts that reimburse you months later, or significant bills you owe at year-end. The Form 990 instructions note that many states that accept Form 990 require amounts to be reported on the accrual method. The instructions also say an organization that keeps cash-basis books can file an identical accrual-basis return with the IRS that it prepared for its state.

Some charities keep cash books during the year and have their accountant adjust to accrual at year-end. Ask yours what fits.

What the annual return asks

• Form 990, Part XII, line 1 asks which method you used to prepare the return: cash, accrual or other. If you changed methods from the prior year, or checked "other," you explain on Schedule O.
• The instructions say you should generally use the same method on the return that you use for your books.
• Once you've adopted a method, changing it generally needs the IRS's consent, usually by filing Form 3115, Application for Change in Accounting Method. Some changes qualify for automatic consent. This is a job for an accountant.
• Line 2 asks whether an independent accountant compiled, reviewed or audited your financial statements, and whether a committee oversees that work.
• Line 3 asks whether you had to have an audit because of federal awards. The 2025 instructions still show the older threshold of $750,000. The current federal rule (2 CFR 200.501) requires an audit for an organization that spends $1,000,000 or more of federal awards in its fiscal year.

Form 990-EZ asks the same method question (cash, accrual or other) in its heading.

Audits and when to expect one

Some states require a review or an audit once your revenue passes a set amount. The thresholds and rules differ by state, so check with your state's charity regulator. Funders and lenders may also ask for one. Our guide to audits, reviews and compilations explains the three levels of accountant work and the triggers in more detail.

Put the dates on your calendar

Once you know your year-end, our compliance calendar works out your annual return deadline and other key dates. Add the board's budget meeting and the month you close the books.

Fiscal year and accounting checklist

• Our board has chosen a fiscal year and written it into the bylaws
• Our bylaws, EIN record, Form 1023 and annual return all show the same year-end
• We know our annual return due date
• We've chosen cash or accrual, and our bookkeeper uses it consistently
• We know what our state requires for financial reports and audits
• If we change our year, we'll file the short-period return on time