You may have thought you had answered the question about how long a year is, and when it starts and ends, while you were in elementary school.
Remembering which months have 30 or 31 days may have taken you a little longer. And then, when you were told that a year is actually approximately 365.25 days (instead of 365) in order to account for a leap year every four years that may have shaken things up a bit.
So now, when you’ve mastered that rhyme about the months and their days, accepted that every 4 years the year has an extra day in it, and are very confident in celebrating the end of every year on December 31, you learn that in the business and tax world, a year is not necessarily what you thought.
In accounting and business, we don’t just talk about a year, we also discuss Fiscal Years, Calendar Years, and Tax Years. These can all be the same, but they don’t have to be. So here are you questions answered:
Types of Years
What is a Calendar Year?
This is an easy one. January 1-December 31. Many businesses will choose to base their accounting on the calendar year.
What is a Fiscal Year? FY?
The Motley Fool defines the fiscal year as, “…essentially a customized 12-month period used for accounting purposes.” It’s basically any accounting 12 months that’s not a calendar year. It’s often abbreviated as FY and written using the year that the fiscal year ends. For example, the US Government has a fiscal year that runs October 1-September 30. Even if something occurred in November 2019, that would still be considered Fiscal Year (FY) 2020.
What is a Tax Year?
The Tax Year is a term used by the IRS. According to the IRS the tax year can either be the calendar year or the fiscal year–depending what a business uses for its financial reporting. The tax year is the 12-month period that you report your income and file your taxes based on.
All About the Fiscal Year
What different options can I choose from for a fiscal year?
There are no specific dates for a fiscal year. It can be any customizable 12-month period that starts on the first day of the month and ends on the last day of a month. As mentioned above, the US Government operates on a fiscal year that starts October 1 and ends on September 30. Many schools tend to have a fiscal year that starts on June 30 and ends on July 1 to coincide with their school years, while retailers often start and end their fiscal years in January/February after the holiday season purchases and post holiday returns.
But, wait there’s more…
There also exists the option of a 52 or 53 week fiscal year. In this scenario, the fiscal year does not need to end on the last day of the month, but rather on the same day of the week in relation to set a date. For example, the closest Monday to October 31.
How do I choose a fiscal year?
First of all, be aware that the IRS does require certain businesses to follow the calendar year. According to the IRS, “…if any of the the following apply you must adopt the calendar year:
- You keep no books or records;
- You have no annual accounting period;
- Your present tax year does not qualify as a fiscal year;or
- You are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.”
Be sure to check with a tax accountant or attorney before choosing whether to follow a fiscal or calendar year.
Once you are clear of the requirements for your business, choosing the 12-month reporting period for your business should be a decision based on what will make the most sense and give the most accurate portrayal of the financial situation of your business. For example, if you do a lot of work with the federal government, you may choose to adopt the fiscal year that they use. There’s also nothing wrong with simply choosing to use a calendar year as a fiscal year. In fact, it is often the simplest option.
The actual act of officially having a tax year in the eyes of the IRS is pretty simple–it is whatever tax year you file on your first tax return. However, once you do that, it is fairly binding. It is much more difficult to change your tax year than to choose it in the first place. Once a tax year has been adopted, you will need to file Form 1128 to the IRS in order to change it.
How Does a Fiscal Year Affect Taxes?
Whether you use choose to follow a fiscal year or calendar year, the tax requirements for your business remain the same. The only difference is that businesses that choose to use a fiscal year separate from the calendar year have different tax filing deadlines. Click here to see the IRS tax calendar, and work with your accountant to make sure that you are paying taxes when you need to.
Looking for financial advice? Contact us at Lumen Advisory and Finance!