What is a Fiscal Year?

What is it?

A fiscal year is a business's annual accounting period. Typically, this is the same as the calendar year (January 1 to December 31).

Do I have to use the calendar year?

No, you do not have to use the calendar year. And if your business is taxed as a partnership or an S corporation, you might not be able to (you would have to request permission from the IRS).

Should I use the calendar year?

The short answer is "probably." The longer answer is "talk to your accountant."

There are a number of factors that affect the answer to this. When is your busiest time of the year? Do you have a particular slow point during the year? Do you sell goods and have a high volume of inventory? The answers to these questions may point to a different type of fiscal year.

How do I choose a fiscal year?

Your CPA can help you decide based on, among other things, the questions above. For most businesses, it makes sense to keep the calendar year. Even if the questions above lean you toward a different fiscal year, your accountant might still recommend that you keep it simple and use the calendar year.

What are some non-calendar year fiscal year examples?

1. United States Government – October 1 through September 30;

2. Retail – Retailers will often pick January 31, allowing them to collect data and assess their income from the holiday season;

3. Agriculture – Depending on the crops, distributors, and availability of labor (among other factors), agricultural businesses, including farms, may select a different fiscal year;

4. Schools – Schools, colleges, universities, etc. tend to select a fiscal year that corresponds to the school year.

If you live somewhere with a busy season and an off season (for example, the Coachella Valley), other industries will select a fiscal year that reflects those seasons. And if you have a nonprofit that is very particularized on one grant or related grants, then you might select a fiscal year that follows the award of those grants.

Why does it matter?

Every year, your Chief Financial Officer or your business accountant will prepare the business's financial statements. These will reflect the business's performance over the previous fiscal year. So your fiscal year determines the perspective from which you are analyzing those documents. And, significantly, if you have shareholders or investors who are not involved in the day-to-day operations, the fiscal year determines the perspective from which they will analyze these documents.

When you form the business, you will select a fiscal year (this will be reflected in your initial Board of Directors minutes). If you fail to adhere to that fiscal year (or take the proper steps to change it), then you're ignoring the formalities necessary to avoid veil piercing.

Conclusion

Like so many other decisions, selecting an appropriate fiscal year can affect the value of your business, including its perceived value to potential buyers or investors. Talk to your CPA before deciding, and make sure it fits with your business, both operationally and financially.