Calendar Year vs. Fiscal Year

How does a business choose whether to operate on a calendar year or a fiscal year? That is a question I am frequently asked. The follow-up question is, “What difference does it make?”

A calendar year, obviously, runs from January 1 to December 31, just like the calendar on your wall. A fiscal year is any twelve-month period that begins and ends differently than the calendar. For example, the fiscal year for schools is usually July 1 to June 30. That way, their accounting and tax records conclude at about the same time that the school year ends and students are off for the summer.

Under IRS rules, a tax return is usually due on the 15th day of the fourth month after the end of the tax year. If the tax year is a calendar year, as it most often is, then the return is due on April 15, a date we are all familiar with (for corporations, the deadline is the 15th day of the third month following the tax year, or March 15 for a calendar year).

However, the rule does not specifically say “April 15” or “March 15,” because if the fiscal year is different than the calendar year, those dates fall somewhere in the middle, and a year’s worth of accounting is not available from which to prepare a return. For an entity like our school example above, the 15th day of the fourth month after the end of the tax year would be October 15.

So, back to our original question: If the tax return is always due a fixed number of months after the tax year, why do some entities choose to operate on a fiscal year-basis? The answer is that it’s almost always a matter of convenience, and in the absence of any compelling reason, they will usually just stick with a calendar year.

For example, a ski resort has its busiest season in the winter. There is no way they want to prepare their tax return in the middle of March, so they might choose a fiscal year that runs from July 1 to June 30.  Or it could just be personal preference. Maybe the president of the company always goes to the Bahamas in the spring and doesn't want to mess with his taxes until he gets back. Or it could have nothing to do with taxes. Maybe in a seasonal business, they wanted to make sure they captured their most lucrative month their first year so that their profits would be higher, enabling them to qualify for bigger loans, and that's what they've been doing ever since. That sort of thing.

Can an individual taxpayer file on a fiscal year-basis, or is that something reserved only for businesses? The answer is that individual taxpayers can elect to file on a fiscal year-basis. Perhaps partners in a seasonal business, with an accounting year of October 1 to September 30, want their personal returns prepared at the same time as their partnership return. They can elect to file on January 15, just like their business.

But to be honest, it's very rare, even though it is possible. I've never had a client that didn't just operate on a regular calendar-year basis, even if they own a business. Usually, its only large corporations that do -- the IRS actually places restrictions on any other entities electing to use a fiscal year, and only allows it when certain conditions are met.

It's also something that is generally chosen when you file your first return. After that, it's considered that you've already made your choice, and you have to get special permission from the IRS to change, using Form 1128, Application to Adopt, Change or Retain a Tax Year.

If you think a fiscal year is something you might want to consider, please feel free to contact me and we can discuss the options. It is actually a complicated process because it requires either a short-year return or a deferral period of several extra months in the year that the change occurs, which is one reason that IRS approval is not always automatic

6 Comments

  • Gary Jones says:

    Our church and school are planning to synchronize their fiscal years in order to have common reporting periods and make our audit a little easier. The church currently has a calendar year for its fiscal year and the school has a May 31 fiscal year. It seems that a June 30 fiscal year end makes most since but the school would like for the fiscal year to be July 31 since school starts around August 1 and their teacher contracts are from August 1 to July 31. However, when I look at most schools they end their year on June 30. The school also wants to keep accounting records based on a school year since they are held accountable for the school year. The church and school report financials to the church quarterly and it would be nice to have them report on a natural quarter end such as March 31, June 30, and etc. If we go to a June 30 fiscal year how would you suggest reporting quarterly and annual financial statement?

    Thank you,

  • Bill Brough says:

    Sorry I didn’t respond to this earlier, Gary, and probably your church/school administrators have finalized your fiscal year. But for the record, I agree with you that a July 1 – June 30 fiscal year makes sense for a school, not only because it keeps the natural calendar quarters intact, but because it isn’t that important to try to match fiscal accounting periods with teacher contract periods. I can see why the administration likes the convenience of having the teacher contracts fall entirely within a given fiscal year, but there are lots of events, for all business entities, that overlap fiscal periods. It isn’t possible, or even terribly important from an accounting perspective, to try to get them all to line up for you nice and neat on the calendar. On the other hand, and for the same reasons. it is not a big deal if they do decide to go with an August 1 – July 31 fiscal year, for exactly the same reasons. If that is what they have chosen to do, it need not be a difficult or complicated adjustment. The principles of accounting will still make it work.

  • ASEYR says:

    difference BETWEEN CALENDER YEAR AND FISCAL IS WHERE IS STARTS AND END ONLY.
    FISCAL YEAR EXAMPLE beginning JULY 1 2013, END JUNE 30 2014.
    CALENDAR YEAR difference THAT’S SEE ONLY ON YOUR WALL, beginning JAN 1 2013, AND END DEC 31 2013.

  • Bill Brough says:

    Thanks for your comment; that certainly defines a fiscal and a calendar year. Of course, how those different 12-month periods apply to business and in tax law is the rest of the story….

  • Ashleigh says:

    This will be my first year filing and I’m the sole proprietor of a seasonal business.
    I’ve filed an extension for 2013 because I want to make sure that I do this properly the first time.
    There aren’t many sources in my industry, most seem lost, and those who aren’t closely guard whom they trust.

    How do I notify the IRS that I want to choose a fiscal year over calendar year?

    I’d prefer to comb through my bookkeeping when business is slow, which is between July and September. I want to approach and hire a tax professional carefully. I may make a poor choice if I don’t have a firm grip on reality. It may make our future business together more efficient if I’m not codependent.

    What’s your advice?

  • Bill Brough says:

    Ashleigh, thank you for your question. You sound very bright and entrepreneurial. What’s your seasonal business, if I may ask? I used to think being a tax professional was seasonal, but there really isn’t any downtime for me anymore, just time when I work normal hours as opposed to putting in 18 hour days!

    To answer your question, requesting a change from a calendar to a fiscal year generally happens using IRS Form 1128, Application to Adopt, Change, or Retain a Tax Year, as described above. However, if your business is a C Corporation, it is possible to simply choose a fiscal year when you file your first tax return.

    Keep in mind that other entities (S Corporations, LLCs, partnerships, etc.) can request a fiscal year but are not guaranteed approval; C corporations are. Generally, an S corporation is required to use a calendar year unless there is a business purpose to the change, e.g. you have a seasonal business. Again, that’s not a guarantee of approval, but at least it allows you to make the case.

    It’s a little more complicated with LLCs and partnerships. The entity generally has to follow the tax year of its partners, and that almost always means that a non-calendar year request is generally denied.

    I also need to add that the IRS isn’t interested in letting a business bounce back and forth between a calendar and a fiscal year. Once you have requested and been granted a change, you are almost certainly not going to be approved if you subsequently request a change back to a calendar year.

    Hope that helps. Those are just quick, summary answers and you are welcome to contact me privately using the email information on my website.

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