Every 12 months, companies are required to report their income and expenses to the government to calculate and pay their taxes. These financial reports are also used to prepare financial statements and for budgeting and auditing purposes. How each company defines its accounting year is called a fiscal year. Companies typically set their fiscal years according to the nature of their businesses and when revenues and expenses best align. This article lays out how a fiscal year works, why companies opt to use them and related IRS requirements.
What Is a Fiscal Year?
A fiscal year is a set one-year accounting period used for financial reporting and budgeting. The IRS distinguishes a fiscal tax year from the calendar year, defined as either "12 consecutive months ending on the last day of any month except December" or "a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month." Entities may decide not to follow the calendar year based on their accounting practices and a variety of other reasons. For example, the U.S. government follows an Oct. 1 to Sept. 30 fiscal year so that newly elected officials can participate in the budget process. That said, many types of businesses, such as sole proprietors, limited liability companies and S corporations, must, by default, use the calendar year as their tax year unless they receive permission from the IRS to change it.
- A fiscal year allows businesses to capture their best-performing months when they don't coincide with the calendar year.
- A fiscal year can vary from company to company, even within the same industry.
- Per IRS requirements, not all businesses are eligible to follow a fiscal year.
Fiscal Year Explained
A financial year equals 12 consecutive months during which a business tracks its finances for tax and reporting purposes. Businesses can follow the standard Gregorian calendar, which begins Jan. 1 and ends Dec. 31. Or they can designate an alternate fiscal year that best suits their accounting needs, such as one that closes after an expected increase in revenue. This is often the case in the retail industry, where many companies conclude their fiscal years at the end of January to include holiday season earnings. This also helps investors more accurately assess the business's financial health.
A fiscal year is also referred to as a budget year or natural business year, because it ends when sales or other activities are at a natural low point.
How Does a Fiscal Year Work?
Unless a business has a required tax year, as stipulated by the IRS, its tax return due date is determined by the fiscal year's end set by the company and, if necessary, approved by the IRS. For example, a university with a fiscal year that starts July 1, 2022, and ends June 30, 2023 —typical for the education industry — would file its corresponding tax return for FY 2023 after its June year end.
A variation of a fiscal year is the 52–53-week fiscal year, which doesn't have to end on the last day of the month. Popular among retailers and hospitality companies, for which sales vary widely on weekday vs. weekend days, the 52–53-week fiscal year views a year in terms of its total weeks, not months. Doing the math, 52 weeks multiplied by seven days a week equals 364 days, a day shy of a full calendar year. The 53-week year, which occurs every five to six years, accounts for the accumulation of missing days plus any leap days.
What's the benefit? The 52–53-week fiscal year improves comparability between quarters or accounting cycles, which are divided into blocks comprising four-, five- and four-week segments and end on the same day of the week in the same month each year. This means every quarter has the same number of weekends and holidays as the year before, which makes year-over-year comparisons more precise.
IRS Requirements for Fiscal Years
Regardless of whether a company abides by the typical calendar year or has selected its own fiscal year, sooner or later it will come time to file its tax return. While a calendar year could theoretically be a fiscal year, the IRS specifies the latter as 12 months in a row that end on the last day of any month but December, or a 52- to 53-week span that doesn't have to end on the last day of a month. However, the IRS bars certain companies from operating under a fiscal year for the following reasons:
- The company doesn't keep books or records.
- The company has no annual accounting period.
- The company's present tax year does not qualify as a fiscal year.
- The company is required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.
If a business that follows the calendar year is eligible and wants to switch to a fiscal year or change the fiscal year it uses, it must file (opens in new tab)Form 1128 with the IRS and wait for approval. This process may or may not require a fee, depending on how the decision process goes.
Benefits of Fiscal Years
A business that chooses to use a fiscal year opts for one that provides more consistency, clarity, and truth than what the standard calendar year would show. As mentioned above, retail companies often choose to complete their fiscal year at the end of January to capture and illustrate the complete picture of their busy season, following the natural peaks and valleys of their business or industry. The same applies to seasonal businesses that end their fiscal year after their peak times, as well as nonprofits, which time their fiscal years to end after program year or grant cycle.
In addition, companies that follow a fiscal year can potentially reduce their tax burdens by better balancing their total expenses and income within the same year. To better understand this, consider a business that operates on a calendar year. The preceding retail example applies here, too.
Another benefit: Accounting firms are at their busiest in preparation for the April 15 tax-filing deadline. Unsurprisingly, it's also when they likely charge the most. Businesses that follow their own fiscal year may be able to save money by engaging with accountants at slower times of the year.
Examples of Company Fiscal Years
Companies often begin or end their fiscal years in a way that best serves their internal processes, peak times of business and methods for recording revenue. Here are some fiscal-year examples for well-known companies in different industries:
- Apple begins its fiscal year on the last Sunday of September. Its 2022 fiscal year began Sept. 26, 2021.
- Microsoft starts its fiscal year June 30.
- Walt Disney Co. ends its fiscal year on the Saturday nearest Sept. 30. Its 2022 fiscal year ended Oct. 1.
- AMC Entertainment Holdings, Inc. uses a fiscal year that aligns with the calendar year, beginning Jan. 1.
- Target's fiscal year ends on the Saturday closest to Jan. 31. Its 2022 fiscal year ended Jan. 29.
- Staples' fiscal year ends the same day.
- The U.S. federal government begins its fiscal year on Oct. 1.
- The U.K. fiscal year ends on April 5.
- American Express follows the calendar year.
- JPMorgan Chase and Bank of America do, too.
Travel and hospitality:
- Marriott International goes by the calendar year.
- The same is true for Delta and JetBlue.
What you need to know now
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Whether your business follows the calendar year or a fiscal year for filing taxes, NetSuite's cloud accounting and financial reporting software simplifies the process, eliminating the need for time-consuming, labor-intensive and error-prone manual calculations. The solution manages the entire accounting cycle, automating bookkeeping, forecasting and reporting tasks, so by the time a business completes its fiscal year, it will have everything it needs to file its taxes, prepare its financial statements and issue its annual report. Additional benefits include real-time insights about the company's financial performance, as well as compliance with government regulations and accounting standards.
Fiscal years provide companies with the ability to establish their accounting year in a way that presents an accurate picture that would be otherwise compromised by using calendar year cutoff. When a company tailors its fiscal year to best align with its expected income and expenses, it can begin to see trends year-to-year, while potentially avoiding tax burdens and higher accounting fees that accompany operating under the standard calendar year.
Fiscal Year FAQs
Why use a fiscal year instead of a calendar year?
Different fiscal year structures can also minimize potential tax burdens, possibly lead to lower accounting costs and simply make tracking company growth easier from year to year. A fiscal year may be referred to as a budget year or natural business year because it ends when sales or other activities are at a natural low point.
Is the fiscal year the same as a calendar year?
A fiscal year is a set one-year accounting period that businesses and governments use for financial reporting and budgeting. The IRS distinguishes a fiscal year as separate from the calendar year, defining it as either "12 consecutive months ending on the last day of any month except December" or “a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month.”
What is a fiscal period in accounting?
A fiscal period in accounting can be defined in two ways. One, a fiscal period can encapsulate the full 12 months of a company's tax year. Two, a fiscal period can be viewed as each of the 12 consecutive months that constitute a complete fiscal year.