Fiscal Year Definition: What it is and How it Applies to a Business

A good understanding of financial terms can empower you to make informed decisions, effectively manage your finances, navigate complex statements, and enhance your ability to achieve long-term growth and success. One important concept to grasp is the fiscal year definition. Follow along as we shed light on insights into the fiscal year meaning, its importance, and its impact on your business’ accounting and taxes.

What is a fiscal year?

Let’s start by digging into the definition of “What is a fiscal year?” A fiscal year is the one-year period that businesses use for bookkeeping and accounting purposes. It determines the time period used to prepare financial statements and track financial activities like earnings (revenue) and expenses. It may or may not align with the standard calendar year.

What does fiscal year 2025 mean?

When someone mentions “fiscal year 2026,” it refers to the 12-month period starting on a specific date in 2025 and ending on the day before that date in 2026. For example, if an organization’s fiscal year begins on May 1, 2025, then their fiscal year 2026 would run from May 1, 2025, to April 30, 2026. The fiscal year end for this organization is April 30, 2026.

Sometimes you’ll see Fiscal Year abbrievated with the letter “FY.” For example, Fiscal Year 2026 may be shortened to FY26. This is just a shorter way of denoting a specific fiscal year.

Why do businesses use a fiscal year?

If you’re wondering why some businesses use a fiscal year, read on. A defined fiscal year or period helps can help a business stay organized and on top of accounting, bookkeeping, payroll activites.  

More specifically, it allows small businesses to:

• Align financial reporting to specific operational and accounting needs
• Set strategic goals based on revenue
• Plan budgets for future periods or years
• Assess performance and make informed decisions for the future
• Properly track financials for tax reporting, including peaks or valleys in finances

By aligning with fiscal cycles, you create a consistent and structured way to manage financial activities!

What is the difference between a calendar and fiscal year?

A fiscal year and a calendar year are two different ways for small businesses to measure a 12-month period. The main difference is when the calendar begins and ends.

A calendar year follows the widely accepted sequence of months and days starting from January 1 and ending on December 31. For example, individual income taxes are assessed based on a calendar year in the U.S. As a business, if your fiscal year ends on December 31, you’re using a calendar year as your business tax year. 

In this case, you’d follow traditional business tax deadlines. When tax time comes around, using a standard calendar year means you’ll report all your financial activities for that specific January to December period on your tax returns.

A fiscal year is also a 12-month period. However, it can start on any date and end 12 months later. And when does the fiscal year start? Unlike the calendar year, which begins on January 1, the start date of a fiscal year varies and doesn’t need to correspond with a calendar year. You may choose any date range to accommodate your fiscal year according to your business’ specific needs. If a company chooses to use a fiscal year, they usually decide when they start the business.

How do you determine a fiscal year?

How do you decide on a fiscal or calendar year as a small business owner? Your choice may be influenced by:

• Common industry practices
• Tax regulations
• Business cycles

Lets dig deeper in to that last point. That is, seasonality. Specific industries generate higher revenues during high-volume sales periods. If you have a seasonal business, it’s helpful to figure out peak months of business operation and end the fiscal year after this time. For example, if you own an ice cream shop with heavy summer sales, you might follow a fiscal year that starts October 1 and ends September 31. In contrast, if you own a company with more consistent monthly sales, such as a mechanic, you may choose to follow a traditional calendar tax year that begins on January 1 and ends on December 31.

Note: Once you choose a fiscal year (commonly during a business formation or incorporation process), plan on using the same method going forward. If you have a reason for changing the fiscal year you utilize, you must apply to the IRS to do so using Form 1128. Unless you have a required tax year, generally you adopt a tax year by filing your first income tax return using that tax year. S corporations must indicate their choice when they make their election on Form 2553, Election by a Small Business Corporation.

Should you report your fiscal year to the IRS?

Aside from reporting your accounting year on your IRS EIN application, you don’t have to report your fiscal year to the IRS. For each business tax return, however, you should indicate what tax year you’re using.

Here is the protocol for tax reporting for non-calendar year fiscal years, according to the IRS:

• If you use a non-standard fiscal year (aka your tax year ends on a day other than December 31), your return is due on or before the 15th day of the third or fourth month after the close of your fiscal year, depending on the business structure.
  • Partnership and S Corporation returns are due on the 15th day of the 3rd month after the close of the fiscal year.
  • C Corporation returns are generally due on the 15th day of the 4th month after the close of the fiscal year.
• If your tax deadline falls on a Saturday, Sunday, or federal holiday, the due date is moved to the next business day.

Get help with small business tax reporting

Understanding fiscal years is a key concept to grasp as a small business owner. A well-planned fiscal year brings benefits like streamlined financial analysis to your business. It may even help you make informed decisions to grow your business confidently.

Whether you’re a business of one or have a small team, Block Advisors has assisted millions of self-employed individuals and small business owners in achieving more confidence and ease in managing their taxes and financial matters. We offer additional small business services to support you further. Whether it’s taxes, bookkeeping, payroll, business entity formation, or compliance, we can help you tackle your small business to-do list so you can get back to doing what you love.

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This article is for informational purposes only. The content may not constitute the most up-to-date information and should not be construed as legal advice.