Fiscal Year vs. Calendar Year: Definitions and Benefits

How is a fiscal year different from a calendar year?

In many facets of life, the terms fiscal year and calendar year are frequently used. The calendar year is generally used, even though the fiscal year is more typical in businesses. Understanding the distinctions between the fiscal and calendar years is crucial as failing to do so could lead to accounting errors. Although both have a duration of 365 days, they can start at any time. The fiscal year may also be based on the calendar year.

ACCOUNTING 101 – Calendar vs. Fiscal Year

Examples of fiscal years

Although a fiscal year is one year long, it is not always the same as the calendar year. For example, a fiscal year can run from Jan. 1 to Dec. 31, but not all fiscal years, as a calendar year does. This is so that certain entities can decide how their fiscal year begins and ends in accordance with their requirements or routines for accounting and auditing. Because of this, it is frequently due to the nature of the business when fiscal years don’t coincide with the calendar year.

Here are some examples of fiscal years:

Here are a few instances of the conclusion of a fiscal year for various corporations:

What is a fiscal year?

A fiscal year is a cycle of 12 consecutive months that businesses and governments use for accounting and budgeting. In essence, it’s a year-long period that ends on the last day of any month that aids in the preparation of financial statements and the calculation of taxes for both individuals and corporations. Fiscal years take into account both revenue and earnings, making yearly financial comparisons for publicly traded companies and their investors easier.

Internal Revenue Service (IRS) requirements for fiscal and calendar years

Companies can file their taxes as calendar-year taxpayers or fiscal-year taxpayers, depending on whether the Internal Revenue Code and Income Tax Regulations require a specific company’s start and end dates. In general, the IRS requires that businesses that don’t keep books or records use the calendar year.

Taxpayers disagree with the Internal Revenue Service’s assertion that a fiscal year is any period of twelve consecutive months that ends on a day other than December’s last day. Individuals use a 52- to 53-week fiscal year rather than a 12-month fiscal year. The typical fiscal period for businesses is from April 1 to March 31 because this timeframe better fits their seasonality patterns or specific accounting needs.

Fiscal-year taxpayers must adjust the deadlines when they submit specific forms and make specific payments because the IRS default system runs on a calendar year. Therefore, fiscal-year taxpayers must file by the 15th day of the fourth month following the end of their own fiscal year, even though the majority of taxpayers must do so by April 15. For instance, a company’s tax return must be submitted by August 15 if its fiscal year runs from May 1 to April 30.

If U. S. Businesses must file their first income tax return using the fiscal year they wish to use for tax reporting if they do so. However, they are permitted to observe a calendar year at any time provided they obtain IRS approval or satisfy certain requirements.

What is a calendar year?

The calendar year, also referred to as the civil year, is a 12-month period starting on January 1. 1 and ending on Dec. 31. According to the Gregorian calendar, a calendar year has 365 days, and a leap year has 366 days. Amazon, Facebook, and Google’s Alphabet are a few actual businesses that use the calendar year as their fiscal year.

For tax purposes, many businesses and individuals use the calendar year as their fiscal year. In fact, in the business world, it’s the most prevalent fiscal year. This type of year contains the entire year’s financial data, which can be used to calculate the income tax owed because it coincides with a fiscal year for individual and corporate tax purposes. A calendar year can be used by both people and businesses to plan their future events and manage their schedules.

Benefits of a fiscal year

There are several benefits to using a fiscal year for certain types of businesses. Here are three of the benefits a fiscal year provides:

Consideration of seasonal profits

Seasonal businesses can pick start and end dates that better match their revenue and expenses by choosing a fiscal year other than the calendar year. Thus, a fiscal year can contribute to providing a more accurate picture of a company’s financial performance.

For instance, because of the holiday season, Walmart and Target both use a different fiscal year than the one that is used in the calendar. These businesses can delay closing their year-end books until after the holiday season by selecting a different calendar year.

Helps avoid tax burdens

Businesses that receive significant investments at the end of the year but don’t incur significant costs until the first few months of the following year may end up with a tax burden. Using a different fiscal year can help avoid this.

Avoidance of traditional tax and audit season

Following a fiscal year that doesn’t coincide with the calendar can help you get attention from your accountant since most tax preparation businesses see an increase in business from January to April. If your fiscal year ends on a different date, they will be less busy at other times of the year.

Benefits of a calendar year

While a calendar year has some benefits, a fiscal year also has some. Consider some of the benefits the calendar year provides:

Simplicity

Calendar years coincide with an individuals tax filing deadlines. It is simpler to file taxes when a company’s tax year coincides with the owner’s. In addition, unlike businesses that use the calendar year as their fiscal year, those who wish to use a fiscal year other than the calendar year must comply with specific IRS requirements.

Widespread use

It is simpler to adhere to the same system because the majority of businesses and people use the calendar year. It is significantly simpler to sync to a calendar because many smartphones and applications do so.

Fiscal year vs. calendar year

Understanding the differences between a fiscal year and a calendar year is crucial for understanding both. Use the following distinctions to expand your understanding of both types of years:

Time periods

While a calendar starts on Jan. 1 and ends on Dec. As long as it lasts 12 months, a fiscal year may begin and end at any time during the year.

Income and expenses on taxes

A fiscal year keeps income and expenses together, as opposed to a calendar year that divides them into two tax returns.

Common uses

While most things or events in everyday life follow the calendar year, many businesses do so to help with their finances, taxes, and accounting.

Tax reporting

Fiscal years are more complicated than calendar years when it comes to taxes.

Financial comparisons

Financial comparisons are simpler when the year-end is the same as those of other companies. For instance, using businesses that both use the calendar year when comparing the financials of two companies greatly simplifies the process. When two businesses have different fiscal years, it is more difficult to compare them fairly.

Determining whether to use a fiscal or calendar year

Making wise choices regarding your accounting and finances is crucial. As a result, you must choose between using a fiscal year and a calendar year.

A calendar makes it simple to manage your finances and accounting, but it doesn’t always provide the best benefits. This is because, for some businesses, using a calendar year could result in inaccurate measurements.

The use of a fiscal year is most advantageous for seasonal businesses. Additionally, the use of a fiscal year can be advantageous for any businesses that have characteristics that could result in inaccurate accounting when using a calendar year.

For instance, if a tax preparation company uses the calendar year as its fiscal year, it divides the busiest season of the year into two. In this instance, tax preparation businesses benefit the most from using a fiscal year that expires after the end of tax season.

FAQ

Why do companies use fiscal years instead of calendar years?

Seasonal businesses can pick start and end dates that better match their revenue and expenses by choosing a fiscal year other than the calendar year. In light of this, a fiscal year can aid in providing a more accurate picture of a company’s financial performance.

Are taxes based on fiscal year or calendar year?

Tax returns in the U. S. for the calendar year are typically due on April 15 of the following year. Both the calendar year and the fiscal year can be used to file business taxes.

Is fiscal year the same as financial year?

A business uses a fiscal year, which is a 12-month accounting period, for financial and tax reporting. A fiscal year is also known as a financial year. A fiscal year does not necessarily begin on January 1 and end on December 31 like a calendar year.

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