What Is a Fiscal Year in Business? An Intro

What is a fiscal year?

A fiscal year is the 12-month period a government organization, nonprofit or business uses to track its annual finances. It begins at the start of a quarter, so typical fiscal year start dates are January 1, April 1, July 1 or October 1. The fiscal year-end date is at the end of a quarter. For instance, if your fiscal year begins on April 1 2017, it ends on March 31, 2018. Your fiscal year is mainly used for financial and accounting purposes.

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Differences between a calendar and tax year

You must choose dates to report your finances to the IRS, known as your tax year. These dates are either your company’s fiscal year or the calendar year. Here are the differences between a calendar and tax year and how they coincide with the fiscal year:

Tax year

This is the annual accounting period for your businesses. You’ll report this 12-month period to the IRS for financial and tax purposes. Your tax year is usually the same as your fiscal year. The IRS considers the date of your first income tax to be your official selected tax year. If another company owns your business, you’ll use the same tax year as them. Closely held corporations are allowed to file their tax returns on different dates than their owners, as their tax year is usually their own fiscal year.

Calendar year

Some businesses pick the calendar year as their fiscal year. The calendar year runs from January 1 to December 31. While you usually have the option to choose your own fiscal year or use the calendar year, the IRS requires some businesses to use the calendar year. You must use the calender year if you:

Are a sole proprietorship or single-member LLC
Currently don’t keep financial books or records
Have a current tax year that doesn’t qualify as a fiscal year

Why is the fiscal year important in business?

Your fiscal year calculates all of your business’ finances including costs, profit margin and revenue. Compare these numbers with your yearly budget and goals to determine the year’s financial success. If your business’ busier season occurs at a certain time of year, making the end of that quarter the end of your fiscal year helps you track finances and performance that year. The end of your fiscal year also helps you determine your business’ tax filing and extension dates.

How to choose your fiscal year

Choosing your business’ fiscal year depends on the type of business you have and when it receives most of its revenue. Follow these steps to choose the best fiscal year for your business:

1. Determine the type of business you have

If your business is considered a sole proprietor or is taxed as a sole proprietorship, your fiscal year is automatically the calendar year. If not, select the end of any quarter to be your fiscal year end. Seasonal businesses typically end their fiscal year right after they receive the most business.

Since the government’s fiscal year is from October 1 to September 30, government businesses use that as their fiscal year. If your business collaborates with the government, consider making this your fiscal year as well.

2. Learn when your business makes the most revenue

Choosing your fiscal year depends on when your business receives most of its income. If your busiest time of year is the spring, an option is to end the fiscal year right after that, on June 30. This makes it easier to know your financial standing since you just received most of your revenue that quarter.

For example, if you own a lawn care service in the Midwest region, the busiest time for your business would be summer. Your fiscal year lasts from October 1 to September 30. You’ll simply track and report your finances right after receiving a large majority of your income.

Seasonal businesses also benefit from starting their fiscal year right before their busiest season. For example, if you own a holiday retail store and receive most of your business in the late fall and winter, starting your fiscal year on October 1 helps you estimate your income for the year. You can adjust your expenses accordingly throughout the rest of the year to reach necessary profit margins.

3. Consult with your legal advisor

Since your fiscal year is set internally, you’re able to change it when desired. Most companies have rules and details for changing your fiscal year listed in their corporate by-laws. Your legal advisor will review your by-laws and possible LLC or partnership agreements to confirm if you can legally change your company’s fiscal year.

4. Notify the IRS of the tax year you’re using

Changing your company’s fiscal year usually means changing your tax year, which requires approval from the IRS. For individual businesses, use the IRS form 1128, which is the application to adopt, change or retain your tax year. For S corporations, personal services corporations or businesses with partnerships, use IRS form 8716 to change the tax year.

5. Seek guidance from a tax professional

Some businesses find changing their tax year confusing and time-consuming due to the extensive paperwork and complicated terminology. To ease the process, you may want to hire a tax preparer to complete the forms and explain any challenging tax terms.

What Is a Fiscal Year in Business? An Intro