Fiscal Year vs. Calendar Year: Definitions and Benefits
By Indeed Editorial Team
Updated February 22, 2021 | Published September 25, 2020
Updated February 22, 2021
Published September 25, 2020
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When you work in the business world, it's important to understand the difference between a fiscal year and a calendar year. Understanding what each involves can help you determine which to use for accounting or tax purposes. In this article, we define a fiscal and calendar year, list the benefits of both, compare their differences and help you determine which you should follow.
Related: Q&A: What Does "Fiscal Year" Mean?
What is a fiscal year?
A fiscal year refers to a consecutive 12-month cycle used by companies and governments for accounting and budgeting purposes. Essentially, it's a one-year period that ends on the last day of any month that helps calculate an individual or corporation's taxes and prepare their financial statements. Since fiscal years consider both revenue and earnings, it makes it easier for public traded companies and their investors to make yearly financial comparisons.
Examples of fiscal years
While a fiscal year lasts one year, it doesn't always align with the calendar year. For example, a fiscal year can run from Jan. 1 to Dec. 31 as a calendar year does, but not all fiscal years do. This is because certain entities can choose when their fiscal year starts and ends based on their accounting and auditing needs or practices. Therefore, when fiscal years don't align with the calendar year, it's often because of the nature of the business.
Here are some examples of fiscal years:
U.S. federal government: Oct. 1 to Sept. 30
Nonprofit organizations: Many use July 1 to June 30
Here are some examples of when a fiscal year ends for various corporations:
Apple Inc.: Last business day of September.
Microsoft Corporation: End of June.
Macy's Inc.: In 2019, it ended on Feb. 2, once the company's financial-reporting year ended after the holidays.
What is a calendar year?
Also known as the civil year, the calendar year refers to a one-year period, beginning on Jan. 1 and ending on Dec. 31. Based on the Gregorian calendar, a calendar year lasts 365 days and 366 days during a leap year. Some real-life companies that use a calendar year as their fiscal year include Amazon, Facebook and Google's Alphabet.
Individuals and many companies use a calendar year as their fiscal year for tax purposes. In fact, it's the most common fiscal year when it comes to the business world. Because this type of year coincides with a fiscal year for individual and corporation tax purposes, it consists of the entire year's financial information, which can help determine the income tax payable. Both individuals and corporations can use a calendar year to determine future events and manage their schedules.
Internal Revenue Service (IRS) requirements for fiscal and calendar years
When it comes to taxes, companies can file as fiscal-year taxpayers or as calendar-year taxpayers, so long as the Internal Revenue Code and Income Tax Regulations don't mandate a start and end date for a particular firm. Typically, the IRS mandates the use of the calendar year for businesses that don't keep books or records.
While the Internal Revenue Service alleges that any 12 consecutive months ending in any last day of the month apart from December constitutes a fiscal year, taxpayers see it differently. Instead of a 12-month fiscal year, individuals go by a 52- to 53-week fiscal year. Typically, companies that use a fiscal period have it go from April 1 to March 31 since this timeframe better aligns with seasonality patterns or their particular accounting needs.
Since the IRS' default system operates on a calendar year, fiscal-year taxpayers need to adjust the deadlines when they file certain forms and make certain payments. Therefore, though the majority of taxpayers need to file by April 15, fiscal-year taxpayers need to file by the 15th day of the fourth month after the end of their own fiscal year. For example, a business with a May 1 to April 30 fiscal year needs to submit their tax return by August 15.
If U.S. businesses want to go by a fiscal year for their tax reporting, they need to submit their first income tax return using that fiscal tax year. However, they can observe a calendar year at any time as long as they get permission from the IRS or meet certain criteria.
Benefits of a fiscal year
Using a fiscal year comes with several advantages for certain types of businesses. Here are three of the benefits a fiscal year provides:
Consideration of seasonal profits
Using a different fiscal year than the calendar year lets seasonal businesses choose the start and end dates that better align with their revenue and expenses. This means a fiscal year can help present a more accurate picture of a company's financial performance.
For example, both Walmart and Target use a different fiscal year than the calendar year since they experience a revenue spike in December thanks to the holiday season. Choosing a different calendar year lets these corporations wait to close their year-end books until the holiday season concludes.
Helps avoid tax burdens
Businesses that receive big investments during the end of the calendar year but don't sustain major expenses until the early months of the calendar year can wind up creating a tax burden. Using a different fiscal year can help avoid this.
Avoidance of traditional tax and audit season
Since most tax preparation businesses see an increase in business from January to April, following a fiscal year that doesn't coincide with the calendar can help you receive attention from your accountant. This is because they're less busy during other times of the year should you have a different fiscal year-end date.
Benefits of a calendar year
While a fiscal year comes with some advantages, so does a calendar year. Consider some of the benefits the calendar year provides:
Calendar years coincide with an individual's tax filing deadlines. When a businesses' tax year aligns with that of the business owner, it makes it easier to report taxes. Also, companies who want to use a different fiscal year than the calendar year have to meet specific IRS requirements as opposed to those using a calendar year as their fiscal year.
Since most companies and individuals follow a calendar year, it's easier to follow the same system. Many smartphones and applications also use a calendar year, making it that much easier to sync to.
Fiscal year vs. calendar year
To better understand a fiscal year and the calendar year, it's important to understand how they differ. Use these differences to help deepen your knowledge of both types of years:
While a calendar starts on Jan. 1 and ends on Dec. 31, a fiscal year can start and end at any time during the year—so long as it lasts 12 months.
Income and expenses on taxes
While a calendar year splits income and expenses into two tax returns, a fiscal year keeps them together.
While normal life activities or occurrences abide by the calendar year, many businesses follow a fiscal year to help with their finances, taxes and accounting.
When it comes to taxes, calendar years offer greater simplicity compared to fiscal years.
Having the same year-end as other companies makes it easier to make financial comparisons. For example, when you want to compare the finances of two companies, using companies that both follow the calendar year makes the process infinitely simpler. If two companies follow different fiscal years, it's harder to make an accurate comparison.
Determining whether to use a fiscal or calendar year
It's important to make smart decisions when it comes to accounting and your finances. Because of this, you need to determine whether you should use a fiscal or calendar year.
While a calendar makes it easy to manage your financial and accounting affairs, it doesn't always offer the greatest advantages. That's because using a calendar year can potentially create inaccurate measurements for certain businesses.
Seasonal businesses benefit the most from the use of a fiscal year. Also, any businesses that have characteristics that can lead to inaccurate accounting from the use of a calendar year can benefit from the use of a fiscal year.
For example, if a tax preparation business uses a calendar year as its fiscal year, it splits up the businesses' busiest time of the year. In this case, using a fiscal year that ends after the end of the tax season benefits tax preparation businesses the most.
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