What Is a Fiscal Year and Why Do Businesses Use It?
Uncover the strategic reasons businesses utilize a fiscal year for their financial cycles, impacting reporting, budgeting, and tax planning.
A fiscal year is a 12-month period organizations use for financial reporting and tax purposes. It allows businesses to manage accounting cycles and assess financial performance over a consistent timeframe. This structured approach tracks income, expenses, and financial health for internal management and external compliance.
Understanding the Fiscal Year
A fiscal year is a 12-month period chosen by an entity for financial records and reporting. Unlike a calendar year (January 1 to December 31), a fiscal year can start on the first day of any month and end 12 months later. This flexibility aligns financial reporting with operational realities.
This 12-month span serves as the accounting cycle, recording all financial transactions. For instance, a fiscal year might run from July 1 to June 30, or October 1 to September 30. Most entities use a standard 12-month fiscal year, but some adopt a 52- or 53-week fiscal year, ending on the same day of the week each year.
When an entity begins operations mid-year or changes its fiscal year, it may result in a “short tax year.” This period is less than 12 months and transitions accounting periods. For example, if a business starts in March and chooses a December 31 fiscal year-end, its first fiscal year would be a short one, spanning from March to December.
Reasons for Adopting a Fiscal Year
Businesses often choose a fiscal year that aligns with their natural business cycles. Retailers, for example, often end their fiscal year in January to encompass the entire holiday shopping season, allowing them to account for peak sales and inventory adjustments within a single reporting period. This simplifies inventory counts and provides an accurate financial picture for their busiest period. Agricultural businesses may align their fiscal year with the completion of a harvest cycle, while educational institutions frequently use a fiscal year ending in June, corresponding with the academic calendar.
A non-calendar fiscal year can offer tax planning advantages by allowing businesses to time income or expense deductions strategically. For instance, a company might choose a fiscal year ending after its peak revenue period to defer income and associated tax liability. This timing helps balance income and expenses within the same tax year.
Industry standards and peer practices also influence the choice of a fiscal year. Companies in the same industry often adopt similar fiscal year ends, facilitating easier financial comparisons and benchmarking. For example, many government contractors align their fiscal year with the U.S. federal government’s fiscal year.
Government entities and non-profit organizations commonly use non-calendar fiscal years. The U.S. federal government’s fiscal year, for instance, runs from October 1 to September 30 of the following year. This timeframe provides Congress with time for budget deliberations before the new fiscal year begins.
Establishing and Using a Fiscal Year
New businesses typically choose their fiscal year during initial setup. This decision is communicated to authorities, like the Internal Revenue Service (IRS), when filing initial tax documents. For example, a corporation indicates its chosen tax year on its first income tax return (e.g., Form 1120).
Once selected, a fiscal year must be maintained consistently; changing it usually requires specific procedures and IRS approval. The IRS requires a valid business purpose for a change, such as aligning with a natural business cycle, to prevent tax avoidance. To request a change, most entities must file Form 1128 with the IRS.
The chosen fiscal year dictates financial reporting periods, including annual and quarterly reports. All financial activities, such as revenue recognition, expense accrual, and asset depreciation, are organized within this 12-month framework. This period also determines deadlines for filing tax returns and other regulatory documents. For example, a business with a fiscal year ending on June 30 would typically have its annual tax return due by September 15.