The Difference Between Calendar Year and Fiscal Year for Business Taxes

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Calendar Year vs Fiscal Year: What’s the Difference for Business Taxes?

When filing business taxes, one of the first decisions you must make is whether to use a calendar year or a fiscal year. While both are 12-month reporting periods, they impact how your revenue, expenses, and cash flow are presented, and can even influence financial strategies like accounts receivable financing.

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What Is a Calendar Year?

A calendar year runs from January 1 to December 31 and is the most commonly used tax year.

It is typically required if:

• Your business does not maintain formal accounting records
• You do not have a defined annual accounting cycle
• You are a sole proprietor or certain types of businesses

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What Is a Fiscal Year?

A fiscal year is any 12-month period ending on the last day of any month except December.

For example:

• April 1 → March 31
• July 1 → June 30

Some fiscal years may also follow a 52–53 week structure, depending on the accounting method used.

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If you are using a factoring company that purchases your receivables during the fiscal year, you may want to check the tax implications while you sold your accounts receivable. Accounts receivable factoring services is used by companies that prefer cash on hand rather than wait for clients to pay. In some cases, large companies use a factor to trade accounts receivable for immediate cash. This props up the balance sheet before the fiscal year end and reports cash assets rather than receivables to shareholders.

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Requirements to Adopt a Tax Year

‍Most business owners are free to choose the type of income reporting that works best for their particular business structure. However, the IRS doesn't consider you to have chosen either fiscal year or calendar year if you simply did the following:

• You requested an Employer Identification Number (EIN)
• You paid estimated taxes for your first year in business
• You requested an extension to file your business income taxes
  

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There are certain circumstances when the IRS requires a business to adopt the calendar year reporting method. These include:

• Your business does not have an annual accounting cycle
• You don't keep formal records or books on your business
• Your current tax year does not qualify as a fiscal year

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If you filed your first business tax return using the calendar year structure, you are required to keep it if you later start a business as a sole proprietor, enter into a business partnership or own a controlling interest in an S corporation. The only way you can change to fiscal year reporting is to request permission from the IRS.

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Partial Tax Years

‍If your business was not in existence for an entire calendar year or you changed your accounting period, the IRS considers this to be a short tax year. Your taxes may be figured differently as a result. The IRS requires you to file a return, regardless if you were in business for one month or all 12 months of the year. You should figure your tax bill based on the last day of your short tax year. IRS Publication 538, Accounting Periods and Methods, provides detailed information about how to do this.

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Tax Year Changes

‍You must file IRS Form 1128, Application To Adopt, Change or Retain a Tax Year, if you want to change from one type of reporting year to the other. You are not required to pay a user fee if your request is automatically approved. You do have to pay a fee and request a ruling on behalf of your business if you are ineligible for automatic approval.

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Fiscal Year Reporting Makes Sense for Seasonal Businesses

‍If you run a seasonal business, filing a return under the calendar year system could force you to split your seasons into two different tax years. Assuming that your company prepares profit and loss statements, calendar year reporting would show income and expenses from two different seasons on the same report. When you choose fiscal year reporting, all information from your selling season is reported on the same tax return as well as your company books.

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Why Fiscal Years Matter for Cash Flow and Financing

Choosing a fiscal year can have a direct impact on how your financials appear, especially when it comes to cash flow.

For example:

• Companies may accelerate collections before year-end
• Some businesses use accounts receivable financing to convert unpaid invoices into cash before closing their books

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This can:

• Strengthen the balance sheet
• Improve liquidity ratios
• Present stronger financials to lenders or investors

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Frequently Asked Questions

What is the main difference between a fiscal year and a calendar year?

A calendar year follows January-December, while a fiscal year can start and end in any month.

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Can a business choose any fiscal year?

Not always, some businesses must get IRS approval depending on their structure.

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Is a fiscal year better for taxes?

It depends. Fiscal years are often better for seasonal businesses, while calendar years are simpler.

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Can you change from fiscal year to calendar year?

Yes, but you must file IRS Form 1128 and may need approval.