What Does Fiscal Year Mean for Your Business?

A fiscal year is a 12-month accounting period that businesses use for financial reporting and tax purposes. It provides a structured framework for tracking income, expenses, and overall financial performance. This standardized period allows organizations to assess their economic health and fulfill various compliance obligations.

Understanding the Fiscal Year

A fiscal year is a 12-month period chosen by a business for its financial and accounting cycles. Unlike a calendar year, it does not always align with January 1 to December 31. It can begin on the first day of any month and conclude on the last day of the 12th month. For instance, a business might opt for a fiscal year that starts on July 1 and ends on June 30 of the following year.

This flexibility allows an organization to select a period that best suits its operational rhythm. This 12-month span serves as the basis for preparing annual financial statements, developing budgets, and complying with tax regulations. While a calendar year is universally recognized, a fiscal year is a strategic choice made by individual entities to structure their financial activities.

Why Organizations Use Fiscal Years

Organizations choose a fiscal year to align financial reporting with their natural business cycles, leading to more accurate financial representation. For example, many retail businesses conclude their fiscal year in January, allowing them to capture all sales and returns from the busy holiday shopping season within a single reporting period. This practice provides a complete picture of their annual performance.

Governmental entities, including the U.S. federal government, also use fiscal years. The federal government’s fiscal year begins on October 1 and ends on September 30 of the subsequent calendar year. This specific timing provides Congress with additional time to deliberate on budget decisions after their summer recess, facilitating smoother transitions and better planning for appropriations.

Similarly, non-profit organizations might align their fiscal years with grant cycles or academic terms, such as universities ending their year in June or August to coincide with the conclusion of their academic calendars.

How Fiscal Years Are Determined

Businesses select their fiscal year when formed and registered with the Internal Revenue Service (IRS). If an organization does not choose a different fiscal year, the IRS assumes it will operate on a calendar year basis, ending December 31. Changing a fiscal year after establishment requires IRS approval.

To change an existing fiscal year, a business must file Form 1128, “Application to Adopt, Change, or Retain a Tax Year,” with the IRS. This process involves specific requirements and often necessitates a valid business purpose.

While December 31 is a common fiscal year-end, many businesses choose other dates such as June 30, September 30, or March 31. The selected fiscal year dictates the timing for preparing annual financial statements, filing tax returns (like Form 1120 for corporations), and setting budgetary timelines.

Corporate tax returns for C-corporations are due on the 15th day of the fourth month following their fiscal year-end. S-corporations and partnerships file by the 15th day of the third month after their fiscal year-end.