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

14 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.

  • Jenifer says:

    I am administering a multi-year federal grant award that is on a calendar year, whereas my organization, a K-12 school, is on a fiscal year. I need to show the projected and actual budget for the grant on a calendar year (for grant administers) and on a fiscal year (for audit and tax filing purposes for the school). Can I create a CY/FY budget for this grant? I’m stuck.

    What great advice can you offer me? :)

  • Bill Brough says:

    Jenifer, thanks for your question. I tend think of my clients or my readers as people from the business world. I forget that some of them are from the non-profit world, as you are. Fortunately, basic accounting is basic accounting, so we should be able to help you regardless.

    This is what makes sense to me: The grant is a sub-set of your overall budget at the school. You have other income sources and an abundance of unrelated expenses. Moreover, you are obligated as a school to adhere to your fiscal year for your own books and for your own tax return. Some of the grant-related income and expenses presumably apply to one fiscal year, and some to another.

    However, you are just as obligated under the terms of the grant to show your expenditures of grant funds going to certain projects or activities during the calendar year in which the grant is supposed to be administered. I imagine you have landmarks or milestones that you are supposed to meet throughout the year, and need to be able show your financial compliance on a single-year (or partial year) report of some kind.

    If it was me running your books, for purposes of in-house accounting I would continue to include grant-related income and expenses on a fiscal year basis, with some of them overlapping from one year to the next. If I needed a fiscal year report, I could create and print one using the fiscal year parameters at your school–probably July 1 – June 30. This would not preclude me from occasionally creating a calendar year report isolating only the grant-related income and expenses simply by changing the beginning and ending dates of the report to January 1 and December 31. Depending on your accounting software, it might even be possible to create a grant as a project or set up grant-specific accounts to make sure you can easily create a report using only grant-related items.

    Alternatively, you could use something like an Excel spreadsheet to manage the grant itself, which presumably has a much smaller amount of income and expenditures to account for, and which can easily be laid out in categories or time periods as needed without going into the trouble of doing any extra set-up in your accounting software, or if you don’t have access to the full accounting software at your school.

    Hope that helps. If you want to follow-up with me on any of this, feel free. Particularly if you have QuickBooks and want specific help with how to go about doing some of these things in that program.

    Best of luck, and thanks for bringing your accounting questions to Bottom Line!

  • Cindy Beres says:

    Hi, I just took over as treasurer for a small non-profit run by volunteers. Our income level is low enough that we file Form 990-N. Although our by-laws define our fiscal year as July 1 to June 30, the tax returns are dated August 1 to July 31, going back at least 7 years. Because we are on a cash basis, my guess is previous treasurers waited for the bank statement in July and then filed.

    Do we need to correct this or just carry-on?

  • Bill Brough says:

    Technically, you have until the 15th day of the 5th month after the close of your tax year to file, so I’m not sure how it went from July 1 – June 30 on the by-laws to August 1 – July 31 on your tax returns, but it would have nothing to do with when the next month’s bank statement is available. Probably it was just an innocent error that has perpetuated itself.

    However, the IRS doesn’t particularly care what fiscal year is identified in your by-laws, as long as what is claimed as a fiscal year on your return remains consistent from year-to-year. In other words, they aren’t going to audit you and penalize you in some way for claiming a different tax year on your return than appears in your by-laws. So that may well be why it has stayed the same for the past seven years, and I would suggest that you just carry on as you’ve been doing, especially for such a small, all-volunteer entity.

    If your board of directors feels strongly about making a correction, that would certainly be their prerogative, but I would advise changing the by-laws, not the date on your 990.

    Thanks for getting in touch, Cindy!

  • Constant Marks says:

    What “year” forms do I use? My S-corp (a family farm) has a fiscal year 1 Aug to 31 July, to allow all crop bills to be processed. We have always used the US Form 1120 for the Starting Period Year. Example: for doing the taxes from 1 Aug 2013 to 31 July 2014 we would use the 2013 form (and rules) for the 1120. But we have run into a snag with our forms for Ohio, which does not have a place to indicate you are not using a fiscal year that is the calendar year.
    Do you think our process is correct, using the starting year forms? – thanks

  • Bill Brough says:

    Thanks for your question. When a fiscal year overlaps parts of two calendar years, it is actually the ending-year, not the starting-year, that applies. If the tax year ends on July 31, 2014, using your example, you would file using 2014 forms and rules by October 15 (the 15th day of the third month following close of a tax year) under IRS rules. A phone call to the Ohio Dept. of Taxation would be a quick way to get to the bottom of your issues there. The All-States Quickfinder reports that Ohio follows federal rules with regard to filing dates, so it may simply be that they don’t require you to report whether you are using a calendar or fiscal year because you would already have done so on your federal forms.

    Hope that helps!

  • Constant Marks says:

    Thanks, but this seems like a problem for anybody whose fiscal year ends in the 1st part of the year. I think that many states and the federal government don’t have there forms available until near the end of the year. If your fiscal year ends in say May and you must file with 3 months+15days and the form does not become available until November, what do you do?

  • Bill Brough says:

    You make a good point, Constant. Unfortunately, Congress can be maddeningly slow to make tax policy changes, often waiting until late in December to renew rules that apply retroactively to the whole year. That puts the IRS in a bind in terms of updating forms in a timely way, so it is not unusual for certain tax year forms to be unavailable until well into the following year, by which time I’m usually deep into the tax season and great frustration ensues, but that’s another blog for another day.

    So if it happens that you must file by a certain deadline and some forms you need have not yet been made available for that tax year, your only option is to use the most current available version. On many IRS forms, including the 1120S you would use for your S corp., you will notice that there is actually a place stating that the form is for the calendar year indicated, or for the fiscal year beginning on [blank] and ending on [blank], with space for you to enter the dates of your choosing.

    As a case in point, just this summer I received a K-1 for a client who is a partner in an LLC. The K-1 was the version for the 2012 tax year, but we were filing for 2013, and at the top of the form it said, “For calendar year 2012, or tax year beginning [6/01/2012] and ending [5/31/2013].”

    To be sure, that caused me some momentary confusion and led to a phone call to my client’s accountant, but it turned out to be an excellent case in point of exactly what you are talking about.

    Once again I thank you for your excellent question, and hope that my response is helpful.

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