Many nonprofit organizations generate their largest percentage of revenue in the fourth quarter. Donations are coming in up to the last minute of the year as donors scramble for charitable tax deductions, and December is always a highly anticipated time of year. However, if the fiscal year ends with the calendar year on December 31, then the budget year is over at a time when it would not be ideal to be able to make financial adjustments.
Many organizations find it helpful to adjust their fiscal year from a calendar year to a different cycle, such as October 1 – September 30 year. Benefits of such a change include:
- Make your largest revenue-generating quarter the first quarter of the fiscal year. (This is especially helpful for nonprofit organizations that rely on individual contributions or schools that receive a significant portion of tuition in a certain quarter.)
- Gain nine months of the year to revise budgets based on either a windfall amount or a decline in December giving. An excess amount may be used to upgrade systems, provide raises for employees, or initiate additional programs. If there is a shortfall, then you have time to increase fundraising efforts to recoup the amount needed to operate.
- Have more time to report actual vs. budget results and provide comparative financials to funders, creditors and other interested parties.
How to manage through the ‘change’ year
Funders are typically understanding of the changes necessary for reviewing financial reports during a year of change. If there are questions, an organization may use internal financials to provide comparative information. Tracking program goals year-over-year is challenging during the first year of the change. The new fiscal year will effectively start nine months after the previous year ended, so it will be necessary to set/revise objectives, approve budgets, and review audited financial statements and tax returns ‘early’ to coincide with the new fiscal year. During the change year, the organization will file a Form 990 for the short period and write “Change of Accounting Period” at the top of the short-period return.
How to set the fiscal year
According to the IRS, a fiscal year should coincide with the organization’s natural operating cycle. This means that programs must fit within the fiscal year, and not cross over years. For example, you typically run a fundraising campaign in September and October, and you want the new fiscal year to begin October 1. You either need to adjust the timing of the campaign to conclude prior to October 1, or select a different start date for the fiscal year. Other considerations:
- A fiscal year should end before a period of inactivity.
- Selecting a fiscal year-end that’s the same as a primary funder’s fiscal year-end makes reporting requirements easier.
Making a change to a fiscal year from a calendar year is an administrative challenge. After reviewing the numbers, many organizations see that the long-term benefits outweigh the short-term difficulties. Salmon Sims Thomas specializes in tax, audit, and consulting for nonprofit organizations. Please call us if you are in need of an advisor.