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How to Decide on Your Company’s Fiscal Year
Choosing when to start your fiscal year is one of the first steps when setting up a new business.
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Choosing when to begin your fiscal year is one of the first steps when starting a business. Deciding on a fiscal year start date may not sound crucial, but this small step can significantly impact your business.
Your fiscal year dictates your business strategy and income tax return filing time frame. It determines how you’ll track your company’s financial status and report it to your shareholders. A strategically planned fiscal period can also improve operations, cut costs and help you find investors for your business.
We’ll explain what a fiscal year is and explore the factors involved in choosing the right fiscal year start date for your business.
What is a fiscal year?
A fiscal year is a 12-month financial tracking period. Its start marks the beginning of a company’s annual financial records and accounting cycle. At the end of these 12 months, you have a year’s worth of financial data to help you file taxes and assess your business’s financial health.
“The fiscal year determines how you compare your performance to prior periods,” explained Kaustubh Deo, president of Blooma Tree Experts. “Having a fiscal year that makes sense for the realities of your business will help you make this a useful comparison.”
Unlike a regular year, a fiscal year doesn’t have to start on January 1 and end on December 31. You can start it at any point as long as it spans 12 consecutive months.
As a business owner, you get to adopt the fiscal year that makes the most sense for your company. You can choose from:
- The calendar year (January 1 to December 31)
- A custom fiscal year (any 12-consecutive-month period that does not end on December 31)
Following the calendar year is a straightforward option. However, this doesn’t work for all businesses and industries. When choosing a fiscal year, you must consider several factors, including the nature of your business, taxes and seasonal variations in your company’s activities.
“Many businesses choose to have a fiscal year that doesn’t follow the calendar year,” noted Joe DiSanto, founder and fractional CFO of Play Louder. “For example, it might run from March 1 to February 28 of the following year or September 1 to August 31. Businesses make these decisions based on what works best for their circumstances.”
While you can start your fiscal year anytime, business owners typically align it with the beginning of a quarter. However, fiscal years are usually expressed as a year-end date, so you’ll often hear people discuss “the fiscal year ending March 31” or “the fiscal year ending September 30.”
Examples of companies’ fiscal years
Every business can choose the fiscal year that best suits its peak seasons, internal processes and revenue recording methods. Here are some examples of fiscal years of well-known companies in various industries.
- Amazon: Fiscal year ends on December 31
- American Express: Fiscal year ends on December 31
- Apple: Fiscal year follows a 52- or 53-week cycle, ending on the last Saturday of September
- Hewlett-Packard: Fiscal year ends on October 31
- Walt Disney Company: Fiscal year ends on the closest Saturday to September 30, usually consisting of 52 weeks
How to decide on your company’s fiscal year
When choosing a fiscal year for your company, consider the following questions:
- How is your business organized?
- According to IRS guidelines, what type of tax year should you follow?
- Does your business have well-defined seasons of high and low sales?
- What is your company’s strongest revenue-generating quarter?
- What fiscal year do other businesses in your industry follow?
- Are you comfortable having an accounting period that doesn’t follow the calendar year?
After answering these questions, you’ll need to weigh strategic factors and other considerations that may affect your decision.
Strategic factors that may influence your fiscal year choice
Your business goals and unique circumstances may affect your fiscal year selection. Consider the following scenarios:
1. You want to demonstrate high profitability.
If your company is seeking investors, you’ll want to demonstrate profitable growth since profits are their primary concern. Consider starting your fiscal year during your busy season. This way, your strongest revenue period appears at the beginning of the year when your cash flow statement reflects plenty of cash in the bank, creating a positive impression for investors. Investors may assume that early-year profits will continue throughout the rest of the fiscal year, making your company appear more stable and attractive for funding.
2. You are a retailer with a specific busy season.
If you sell products, consider starting your fiscal year after your busy season ends when inventory levels are lowest. This reduces the complexity of year-end inventory counts and financial reconciliation, making it easier to create accurate financial statements.
3. You want time for strategic planning.
Creating next year’s strategic plan is easier if you aren’t overwhelmed with daily operations. For this reason, some companies choose to start their fiscal year after their busiest period. This lull gives management time to:
- Assess the previous year’s performance
- Research new products and vendors
- Develop a marketing plan and improve the sales process for the following year
4. You want to align your fiscal year with your business cycle.
Some businesses prefer a fiscal year that matches their natural sales cycle. This setup can provide clearer financial reporting and better cash flow management. If your company experiences seasonal fluctuations, aligning your fiscal year with your busiest or slowest period can help with budgeting, tax planning and investor reporting. Here are a few examples:
- Educational institutions: A university might start its fiscal year in August, when classes begin, or in June, when they end, ensuring tuition revenue is fully captured within a single fiscal year.
- Agriculture: A farming business may prefer to end its fiscal year just after harvest, when revenue is at its highest.
- Retail: A retail business may prefer starting its fiscal year in February to account for post-holiday sales and inventory adjustments.
“If you start a business mid-year, your CPA might suggest starting your fiscal year in the month you launched the business,” DiSanto explained. “Alternatively, if your business income cycle is seasonal, you might want your fiscal year to end after your most financially fruitful quarter. For example, if Q1 is always your best quarter, you might choose a fiscal year that runs from April 1 to March 31.”
Essential considerations when setting your fiscal year
The following factors are essential to consider when deciding on your fiscal year’s start:
1. Tax implications
If you’re a sole proprietor, the Income Tax Act requires you to follow the standard tax year (January 1 to December 31). The same applies if you are a shareholder in an S corporation or your business is registered as a single-member limited liability company (LLC). If your business is a partnership, its tax year must align with the tax year of the partners.
Additionally, the fiscal year-end of personal service corporations must also follow the calendar year. For regular C corporations, the fiscal year may or may not follow the calendar year, depending on which option is more advantageous.
While the IRS prefers small businesses to follow the calendar year, it will grant permission to use a different fiscal year if there’s a compelling reason. For example, you may choose a financial accounting period based on the natural sales cycle of businesses in your industry.
2. Sales cycles
If your business doesn’t experience significant fluctuations in sales volume throughout the year, following the standard calendar year should work well. However, if you undergo seasonal variations, you may benefit from a fiscal year that aligns with your industry’s natural sales cycle.
Crystal Stranger, CEO of Optic Tax, pointed out that two primary strategies can help determine the ideal fiscal year for businesses with seasonal sales patterns.
“The natural year is when you have your biggest sales part of the year at the end of your year, this way you are looking like your profit is constantly ramping up each year, and there are many business benefits from this,” Stranger explained. “The other approach is to put your highest quarter as your first quarter, so that the company can reinvest the earnings throughout the year and optimize their tax efficiency.”
If your business is not required to follow the calendar year for tax purposes, you may choose a fiscal year that ends after your busiest period. Consider the following examples:
- Retail businesses: The natural business year for retailers typically ends in January, following the holiday rush and preinventory selling period. This is why, in retail accounting, retailers usually begin their fiscal year in February.
- Home improvement and landscaping businesses: These businesses see little activity during winter months, as clients are less likely to invest in lawn care or renovations. A March or April fiscal year start places the most profitable months in the first half of the year.
- Summer-based businesses: Companies that experience peak sales during summer often set a September 30 fiscal year-end.
- Gyms and fitness clubs: These businesses benefit from starting their accounting period during the holiday season, when health-related resolutions for the New Year are top of mind.
3. Accounting concerns
If you’ve hired an accountant to manage your financial statements, you may save money by choosing a fiscal year that doesn’t align with the standard calendar year.
Accounting firms are seasonal businesses that peak at the end of the calendar year, when most companies close their books. If you wrap up your financial year at a different time, you may be able to take advantage of off-season accounting rates and reduce costs.
Accountants also typically have busy seasons near the end of each quarter, so you also might want to avoid those periods.
4. Additional considerations
Business owners may also choose a fiscal year based on other factors, including:
- Operational convenience: Many companies set their fiscal year-end to coincide with the last day of a month, which simplifies bookkeeping, bank reconciliations and inventory management.
- Tax remittance: Some businesses time their fiscal year-end to align with periods of strong cash flow so they can settle tax liabilities more easily. This often means selecting a fiscal year that ends after peak sales periods.
- Financial reporting: Most companies avoid setting their fiscal year-end too close to their incorporation date. For example, if a business is incorporated on February 1, its principals may choose a January 31 fiscal year-end to ensure they have a full year of financial data before closing their first fiscal year.
Is it possible to change your fiscal year?
You can change your fiscal year, but doing so requires changing your tax year as well — and this is where it gets tricky.
To change your tax year, you must get permission from the IRS by filing IRS Form 1128 (Application to Adopt, Change, or Retain a Tax Year). Personal service corporations, S corporations and partnerships may need to file IRS Form 8716 to use a tax year other than the calendar year.
“Until the first tax return has been filed, a company can choose any fiscal year they would like. However, after this point, it becomes more tricky,” Stranger explained. “The IRS will generally allow companies to change from a fiscal year to a calendar year. However, changing from a calendar year to a fiscal year typically requires either meeting strict rules in one of the revenue procedures that allow change to a natural tax year, or a private letter ruling where the IRS grants permission for the change.”
If you’re doing this for the first time, consider getting a tax attorney’s help. The questions are numerous and complicated, and you’ll want to ensure you answer everything correctly. To get approval, follow the guidelines laid out by the IRS and have a legitimate business reason for requesting the change.
IRS automatic approval for changing a fiscal year
The IRS automatically approves certain organizations for a fiscal year change — with no application fee required if they meet the criteria.
To be considered for automatic approval, your business:
- Must not have changed its accounting period in the previous four years
- Must not have any interest in a pass-through entity like an LLC
- Must not hold stock in a foreign sales corporation
- Must not be classified as a personal service corporation
- Must not be part of a consolidated group
Your fiscal year has broad ramifications
How you set up your fiscal year affects every aspect of your business, including your financial strategy, taxes, recordkeeping and business growth. But don’t be daunted. Keep the questions, factors and advice here in mind, and consult a professional to determine the best fiscal year for your business.
Anna Baluch contributed to this article.
