Fiscal Year Definition

A fiscal year is a 12-month period that businesses, governments, and other entities use for accounting purposes, financial reporting, and creating and tracking budgets. The one-year period doesn’t have to begin on January 1st as our calendar year does. It can start on any date the business or organization chooses, as long as it lasts for twelve consecutive months. Many companies use the January through December fiscal year timeline, but some do not, given the peculiarities of their business. For example, universities and colleges will often use the fiscal year that matches the school year, beginning in September.

Why Use a Fiscal Year?

So, why use a fiscal year or a 12-month period anyway? Why not use some other time frame? Well, the basic answer to this question is that some period of time has to be used, so why not use a year’s time. This all relates back to the ability to measure things and track things regarding a business or organization. Basically, it’s been tradition to use a 12-month period, and that tradition has been codified by the IRS as well as within other countries around the world.

With everyone using the same time period as a measurement tool, then various things about one entity can be compared to another entity. This way, we are not comparing apples to oranges, but apples to apples. For example, if every corporation uses a 12-month time period, versus some other time period, then similar companies’ earnings can be compared to judge the success or failure of that company. 

IRS Requirements for Fiscal Years

In the United States, the IRS has set the fiscal year for taxpayers as a 12-month time frame. This means that individuals have to pay their taxes based on the 12-month calendar year, from January 1 to December 31st. Corporations are also set up to pay taxes based on a 12-month time period, but it depends upon whether the business has established its fiscal year based on the calendar year or some other date. 

In many instances, companies and corporations have to pay taxes on a quarterly basis if required to do so by the IRS, but those four quarters are always within whatever fiscal year time frame that was established by the choice of the company. If a company doesn’t use the calendar year, then it will have to file their taxes by the 15th day of the fourth month following the end of their fiscal year. For example, if a company’s fiscal year begins on October 1 and ends on September 30th, they have to file their yearly tax returns by January 15.

Once a new company files its first tax return based upon a specific fiscal year that it chose to use, the IRS will expect the company to use that same fiscal year every year that taxes are due. However, a company can change what fiscal year they use. If, for example, a company wants to move to a calendar fiscal year, it will have to get permission by the IRS by filing IRS Form 1128, “Application to Adopt, Change or Retain a Tax Year.” 

Examples of Fiscal Years Used by Companies

As mentioned, the fiscal year can be any 12-month period a company or organization chooses to use. The United States government uses a fiscal year that begins on October 1 and ends on September 30. Apple Inc. ends its fiscal year every year on the last Saturday of September, whatever date that is each year. Microsoft Corporation (MSFT) ends its fiscal year on the last day of June every year. Twitter ends its fiscal year on December 31. Before you choose how to determine your company’s fiscal year, review your options and the various advantages and disadvantages with your accounting professional.

Summary

A fiscal year is a 12-month period that businesses, governments, and other entities use for accounting purposes, financial reporting, and other purposes, such as filing taxes. 

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