Businesses track income and expenses for reporting to the Internal Revenue Service (IRS) on a 365-day basis. A fiscal year is an annual period that starts on one day and ends 364 days later. When the period of a year starts on January 1 and ends on December 31, the company uses the calendar year as its fiscal year. Any other start date besides January 1 indicates a fiscal year that is not a calendar year.
The U.S. government’s fiscal year, for example, starts on October 1 and ends September 31. Many school districts have fiscal years that start July 1 and end June 30, to coincide with the school year.
Companies may use fiscal years that better match their revenue cycles. Some retailers don’t start their fiscal year until February 1, for example, because holiday returns from the previous year aren’t concluded until the end of January.
When citing a fiscal year (often denoted as FY), the year on which the closing date falls is considered the fiscal year. So a company with a fiscal year that begins April 1, 2017, and ends March 31, 2018 refers to that period as fiscal year 2018, even though it starts in 2017.
Who uses a fiscal year?
The fact is that except for C corporations, which have more complex accounting issues to deal with, nearly all other forms of business use the calendar year as their company’s fiscal year.
Sole proprietors, or DBAs, use the calendar year because the individual owner IS the business; they are one and the same and need their accounting paperwork to match up. LLCs, partnerships, and Subchapter S corporations also need their fiscal year to match up with the majority owners’ fiscal year, which is January to December.
Unless you run a major corporation, your best bet is to go with a calendar year accounting process. To change it requires petitioning the IRS and providing justification for why you need a fiscal year other than January through December. Few small businesses have such a justification.
Access to accountants
Another reason some smaller businesses close out their books on dates other than December 31 is that many accountants will offer a discount for being able to complete the needed work at another time of year. Having to squeeze in one more client’s fourth quarter paperwork over the December holidays is not appealing to many accountants. If only they could tackle that same work at their leisure in March or May – businesses willing to shift their year-end to a month other than December could save a nice sum of money on accounting fees.