Many things in the financial and accounting world follow an annual cycle, and in many cases, people follow the calendar year.
However, some companies choose to establish a fiscal year that doesn't begin on Jan. 1. Understanding the ramifications of using a fiscal year or a calendar year can help you make smart decisions about your own accounting and finances.
Keeping it simple
Many people use the regular calendar year as a measurement for accounting and financial purposes. Calendar years have the benefit of being simple, and they also match up to many requirements for individuals.
For instance, if you operate a business as a sole proprietor, the business typically won't have a distinct identity for tax purposes, and you'll report its income on your individual tax return.
Because individuals must use a calendar year in filing their taxes, your business will effectively have to use a calendar year as well. Even if you use a business entity like a partnership, limited liability company, or S corporation, you'll typically use the calendar year as your primary measuring period.
When a fiscal year makes sense
With some business, using a calendar year doesn't make as much intuitive sense and can actually distort accurate measurements.
For instance, with a tax preparation business, activity starts picking up toward the end of the calendar year when people start planning for their taxes, and it reaches a height in the run-up to the April 15 tax filing deadline.
Using a calendar year would artificially split up the most important time of year for a tax-prep business. That's why if you look at H&R Block, you'll notice that it uses a fiscal year that ends on April 30 — right after the end of tax season.
When a calendar year makes sense
The challenge of a fiscal year is that you have to be mindful of the impact of not using a calendar year. For example, calendar-year businesses typically file their tax returns on March 15.
However, if you use a fiscal year, the due date is the 15th day of the third month following the end of your fiscal year.
That doesn't put you in an unfair position, but it does require that you keep special track of your own deadlines, and it can lead to confusion if people you're dealing with are used to businesses that use a calendar year instead.
Final words on the right calendar to use
Using a calendar year is the simplest way for a business to handle its financial and accounting affairs, but it isn't always the best.
If your business is seasonal in nature or has other characteristics that make calendar year accounting misleading, then electing to use a fiscal year when available can be easier for you in the long run.