Why Do Companies Have Different Fiscal Years?

A company’s fiscal year is its one-year financial reporting period. While many businesses use the standard calendar year from January 1 to December 31, they are not required to. A company can elect to have its fiscal year end on the last day of any month. This choice allows a business to align its accounting period with its natural activities, providing a more accurate picture of its performance over a single business cycle.

Aligning with Business Cycles

The primary reason for a non-calendar fiscal year is to align the accounting period with the business’s natural rhythm, often dictated by seasonality. For many companies, sales and expenses are not evenly distributed throughout the year. A fiscal year allows them to capture a full seasonal cycle within a single annual report, preventing a busy season from being split between two different years, which could distort financial comparisons.

For example, many large retailers end their fiscal year on January 31. This schedule allows them to include the entire holiday shopping season, subsequent returns, and gift card redemptions within one financial year, providing a complete picture of their most significant sales period. An agricultural company might end its fiscal year after the main harvest is complete and sold, marking the end of its primary revenue-generating cycle.

Operational cycles not tied to traditional seasons also influence this choice. Many universities and school districts use a fiscal year that ends on June 30 to align financial reporting with the academic year. This allows them to account for a full school year’s revenue and expenses in one period. Some companies adopt a particular fiscal year to conform to industry norms, making their financial statements more comparable to competitors.

Tax and Structural Considerations

A business’s structure can dictate its tax year. The Internal Revenue Service (IRS) has rules for pass-through entities, like S corporations and partnerships, requiring them to use the same tax year as their principal owners. Since most individuals are calendar-year taxpayers, these businesses generally adopt a December 31 year-end to prevent the deferral of income tax by owners.

A business can request a different fiscal year if it can establish a legitimate business purpose, such as having a “natural business year.” The IRS provides the 25% gross receipts test, where a company must show that at least 25% of its gross receipts for the last three years were earned during the final two months of the proposed fiscal year. Passing this test proves the requested fiscal year aligns with the company’s business cycle.

Multinational corporations also have structural reasons for their fiscal year. A U.S. subsidiary will often adopt the same fiscal year as its foreign parent company. This alignment simplifies creating consolidated financial statements for global reporting, ensuring data from all entities covers the same period.

The Process of Selecting and Changing a Fiscal Year

A company establishes its fiscal year by filing its first federal income tax return. Once this accounting period is set, a company cannot change it without formal approval from the IRS. A modification requires a substantial business reason and cannot be primarily for tax avoidance.

To request a change, a company must file Form 1128, Application to Adopt, Change, or Retain a Tax Year. The application requires an explanation of the business purpose for the change. Depending on the circumstances, the request may fall under an automatic approval procedure or require a formal ruling from the IRS, which can involve a user fee.

If the IRS approves the change, the transition requires filing a short-period tax return for the months between the end of the old fiscal year and the start of the new one. For example, a company switching from a December 31 year-end to a June 30 year-end must file a return for the short period from January 1 to June 30. After this, the company operates on its new 12-month fiscal year.