What’s a fiscal year?

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A fiscal year is a 12-month period for accounting purposes, not necessarily corresponding to the calendar year. Businesses should consider their type and peak periods when choosing their fiscal year end. The IRS accepts any 12-month period, but it cannot be changed during the year for tax purposes.

A fiscal year is more about accounting than a calendar. Also known as a “financial year” or “budget year,” it covers any 12-month period that its creator decides. The US government, for example, observes from October 1st to September 30th. In the UK, it runs from 6 April to 5 April of the following year.

If a business owner is trying to establish a fiscal year period for a new business, the business type should be the primary consideration. A hair salon or auto repair shop, where work tends to be constant rather than seasonal, would be better off using the regular calendar year, which corresponds to the federal tax year. A retail operation that expects to reach peak traffic around Christmas time, however, would not want the end of this calendar – with the resulting race to accumulate tax information and prepare a budget for next year – to coincide with the Christmas rush .

The best time to end a fiscal year is the point at which inventory and business activities are at their lowest. A resort hotel chain in South Florida, for example, might set it up in August, while a ski resort in Vermont might shut it down in June. Some tax experts advise ending it on a quarterly reference, such as March 31, June 30, or September 30. This is because many financial statements, such as payroll, are released on a quarterly basis.

The IRS generally accepts any 12-month period as a taxable range, as long as the business fills out a Form 1120 stating what the parameters of their tax year will be. Once that date has been established, however, it cannot be changed for IRS purposes during that calendar year. Because preparing a budget is perhaps the most important task for state and national legislatures, governments often use this period to determine when these legislators will be in session.

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