Did you know not all businesses are required to follow the standard January to December tax year? In fact, eligible businesses are allowed to set their own 12-month tax year based on their business activity and annual earnings cycle.
This custom tax timeline is known as a fiscal year, and is divided into four three-month periods known as fiscal quarters.
In this article, we’ll cover everything you need to know about choosing a fiscal year and fiscal quarters for your business — and why fiscal reporting may be better for your bottom line.
What’s the difference between a calendar year and a business’ fiscal year?
You already know a calendar year runs from January 1 to December 31. And a lot of companies use the typical calendar year for tax reporting purposes because it’s the most simple structure to follow.
They also follow the common quarterly structure where Q1 consists of January, February, and March; Q2 is April, May, and June, and so on.
On the other hand, a fiscal year refers to the specifically chosen 12-month period a company uses for taxpaying, financial reporting, external audits, budgeting, forecasting, and more. A fiscal year can start in any month, but it must run from the first day of that month to the last day of the 12th month.
Similarly, fiscal quarters can be different from calendar quarters, but Q1 of a fiscal year must refer to the first three months of that fiscal year, and so on.
What kind of companies choose a fiscal year that’s different from a calendar year?
Typically, nonprofits adopt a fiscal year that runs from July 1 to June 30, according to Investopedia. They do this to align their fiscal year with major donation seasons and the timing of government grant awards.
Because nonprofits tend to receive a significant portion of their funding around the end of the year, as donors rush to contribute before their personal tax year ends, it makes sense for these organizations to move their own fiscal year end to another season when fundraising activity has dropped.
Universities are another example of organizations that often have their own fiscal quarters and fiscal year. They tend to align their tax year with the school year so that each individual school year’s tuition and donation activity is contained in one tax year.
When are taxes due for companies with their own fiscal year?
If your fiscal year starts in any month besides January, you’re required to file taxes by the 15th day of the fourth month following the end of your fiscal year. For example, a nonprofit with a fiscal year running from July to June will be required to file and pay taxes by October 15th.
For new companies, you can establish your own fiscal year simply by submitting your first tax return and noting the fiscal year you will be following. But for companies that already follow the traditional calendar year — or want to change their fiscal year — the process is a bit more complicated.
To make your fiscal year change officially with the IRS, and change when your taxes are due, businesses are required to file a special form, called the Application to Adopt, Change, or Retain a Tax Year. Once this document is approved and you’ve received permission to adopt a new fiscal year, the change can become permanent.
How can changing your fiscal year impact your business’ bottom line?
There are a few reasons a company may choose to update their fiscal quarters and year:
To align with industry peers. If most organizations in your field follow a different fiscal year, it can be advantageous to align your own calendar with theirs for more accurate comparisons.
To prepare for an IPO. Before a company goes public, it may decide to adopt a new fiscal year based on the guidance of investors or the board.
To even out your earnings. If your company brings in a significant portion of its revenue in one season, it may make sense to move that fiscal quarter towards the middle of your year to make revenue and budgeting more predictable.
Why is knowing a company’s fiscal year and fiscal quarters important?
Companies complete their financial reports based on their chosen fiscal year structure. That means if you’re evaluating stocks, conducting due diligence, or researching a potential business acquisition or strategic alliance with a competitor, if you’re not analyzing their financial information based on the correct fiscal quarters, you could be getting an inaccurate picture of the company’s standing.
When you’re looking at stock prices quarter-over-quarter or comparing a company’s earnings year-over-year, it’s important to make sure you’re using that company’s specific fiscal quarter and year information to ensure you’re making the most useful comparisons.
Many companies operate on a seasonal basis with off-season slowdowns. Retail stores, landscaping companies, accounting firms and construction companies are all examples of businesses that experience significant seasonal earnings changes.
If you’re evaluating the financial performance of a company that experiences notable earnings changes throughout the year, it’s particularly important to note their fiscal quarters and adjust your comparisons accordingly.
Want more? If you’re ready to optimize your financial reporting process, Escalon provides bookkeeping, accounting and CFOs services, along with other back-office services that help our clients maximize their potential. Talk to an expert today.