How to Determine a Fiscal Year for Your Business
Optimize your business's financial operations by understanding how to strategically establish your ideal accounting and reporting cycle.
A fiscal year is a business’s 12-month accounting period, distinct from the standard calendar year. It is used for financial reporting, budgeting, and tax compliance, helping organizations track performance and align financial cycles with operational realities or tax requirements.
Fundamentals of Fiscal Years
A fiscal year is a 12-month period chosen by a business for financial and tax reporting. While a calendar year runs from January 1st to December 31st, a fiscal year can begin on the first day of any month and end on the last day of the twelfth month. This allows businesses to align reporting with their natural business cycle.
Many organizations choose a fiscal year different from the calendar year to align reporting with their peak and trough activity. For instance, a retail business might choose a fiscal year ending in January to capture the holiday shopping season’s revenue and expenses within a single period. Other common fiscal year-end dates include March 31, June 30, and September 30.
Once established, businesses must maintain their fiscal year consistently for subsequent years. The Internal Revenue Service (IRS) requires a consistent accounting period for record-keeping and reporting income and expenses. This consistency is important for accurate financial comparisons and meeting tax obligations.
Choosing and Establishing Your Fiscal Year
New businesses have flexibility in selecting their initial fiscal year, established when they file their first income tax return. This choice impacts financial reporting, tax planning, and operational management. The selected fiscal year must end on the last day of a month, unless it is a 52/53-week fiscal year.
When determining a fiscal year, businesses should consider their natural business cycle. Ending the fiscal year after the busiest season can simplify inventory counts, facilitate financial closing, and provide a clearer picture of annual performance. For example, a business with high summer sales might choose a September 30 year-end. Industry common practices can also provide guidance.
Tax implications are another factor, as the fiscal year determines when income and expenses are reported for tax purposes and can influence tax payment deadlines. Some business structures, such as sole proprietorships, single-member LLCs, and S corporations, may be required to use a calendar year unless they receive specific IRS permission.
Specific Fiscal Year Structures
Beyond the standard 12-month period, some businesses use specific fiscal year structures. A notable variation is the 52/53-week fiscal year, which always ends on the same day of the week, typically closest to a month-end. This structure ensures each fiscal period contains the same number of weekdays and weekends, benefiting businesses with strong weekly revenue patterns like retail or hospitality.
Most 52/53-week fiscal years consist of 52 weeks (364 days). An extra week is added approximately every five to six years to account for remaining calendar days, resulting in a 53-week year. This periodic adjustment maintains consistent weekly reporting and allows for more consistent financial comparisons.
A “short tax year” refers to any tax year shorter than 12 months. These periods can arise when a business is newly formed, dissolves, or changes its accounting period, necessitating a tax return for the partial year. For example, if a business changes its fiscal year, a short tax year bridges the gap between the old and new accounting periods.