In the world of accounting, finance and taxes, there’s more than one type of year. In addition to regular years, there are a number of different fiscal years. A fiscal year is the 12-month period a company uses for accounting purposes. Here’s how it works and why it’s important in business and taxes.
Commonly known, the calendar year begins January 1 and ends December 31. This is the year around which most people’s finances are organized. However, some businesses, governments, non-profits and self-employed individual taxpayers use a different year known as a fiscal year.
There are a number of definitions for fiscal year, but the IRS’ definition of an acceptable year for tax purposes is the one that counts.
The IRS describes a tax year as an annual accounting period for keeping records and reporting income and expenses. This definition also applies to a fiscal year. According to the IRS, acceptable tax years are:
- The regular calendar year of 12 consecutive months beginning January 1 and ending December 31
- A fiscal year consisting of 12 consecutive months ending on the last day of any month except December
- A fiscal year that varies from 52 to 53 weeks but does not have to end on the last day of a month
The tax year of 52 to 53 weeks is necessary when a fiscal year is based on weeks instead of months. That’s because 52, seven-day weeks add up to only 364 days, so an occasional 53-week year helps keep the year ending around the same date.
Oftentimes “fiscal year” is abbreviated to “FY,” such as “FY 2023.” Specific fiscal years are referred to with the year in which they end. For example, if a company has a fiscal year from July 1, 2022 to June 30, 2023, the fiscal year would be “FY 2023.”
Common Fiscal Years
Most people and organizations use the calendar year for tax and accounting purposes. However, some other years are also common. Different types of organizations tend to use certain fiscal years, such as:
- The federal fiscal year used by the federal government and its agencies, which begins October 1 and ends September 30
- School districts, which use a fiscal year beginning July 1 and ending June 30
- Retailers, which use a fiscal year beginning February 1 and ending January 31
Although it may not seem like it at first glance, there is a method to this fiscal year madness. Most fiscal years are designed to conform to the organization’s natural year around which its activities and flow of funds are organized.
For example, school districts use the fiscal year ending June 30 because the school year usually ends around June every year. Retailers tend to end fiscal years on January 31 because many do an outsized portion of their sales each December and also have a large influx of returns during January.
Using a fiscal year that fits an organization’s natural year provides a better measurement of its year’s business, which can help improve accounting accuracy.
Using a non-calendar year can also save money on accounting costs. Accountants are often busiest around the end of the calendar year, when many businesses are closing their books. Having a non-calendar fiscal year lets businesses negotiate deals on getting their own auditing done.
Fiscal Year Limitations
As long as the fiscal year you choose fits one of the IRS definitions, you can generally choose any fiscal year you want. However, the IRS says you have to use the calendar year if:
- You don’t keep any books or records
- You have not chosen another annual accounting period
- Your present tax year does not qualify as a fiscal year
You may also have to follow the calendar year if you filed a tax return using the calendar year and then later:
- Started a sole proprietor business
- Became a partner in a partnership
- Became a shareholder in an S corporation
If you do any of these things, you have to get IRS permission to switch to a non-calendar fiscal year. You can do so by filing Form 1128, Application to Adopt, Change or Retain a Tax Year. Additionally, you may have to request a ruling and pay a fee to get the ruling on your request for a different fiscal year. You may need to use this form if you have a short tax year, too. This is any tax year less than 12 months. It can come up when you start a business in the middle of a tax year or change your fiscal year.
Depending on your fiscal year, you may have different income tax deadlines, as well. For individuals and corporations, the IRS expects taxpayers to file tax forms by the 15th day of the fourth month following the end of the fiscal year. For example, if your business’ fiscal year is from July 1 to June 30, your tax deadline would be October 15. Regardless of your fiscal year, be sure to understand all of the taxes that come with running a business.
Having the right fiscal year for your business can help you better understand your business’ financial performance over time. It may also help streamline and save money on your accounting, and could offer a more ideal tax deadline for your business. Before deciding between a fiscal year and a calendar year, consider your business’ budget and weigh all of your options.
Tips for Managing Your Business
- If you’re unsure of the right fiscal year for your business, consider working with a financial advisor. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you need a financial boost, SmartAsset’s 2023 roundup of best banks for small business can help you find a good business loan opportunity for your needs.
- Because you run your small business for profit, you can likely deduct your costs of running it. SmartAsset’s small business tax deduction guide can help you identify common tax deductions to help reduce your business taxes.
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