Fiscal Year - Definition
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Fiscal Year (FY) Definition
A fiscal year refers to a financial year customized for 12 months within which governments use to account, budget, and prepare financial statements. A fiscal year usually runs for 12 months. However, it is not a must for it to start on January 1st and end on December 31st. So, countries fiscal years may differ. For instance, in the United States, the fiscal year for the federal government runs from November 1st to September 30th.
A Little More on What is a Fiscal Year (FY)
A fiscal year may differ from a calendar year. However, the Internal Revenue Service (IRS) gives companies options to either work using fiscal-year taxpayers or calendar-year taxpayers. Companies that choose to work using a fiscal year must strictly follow the IRSs tax filing deadlines, which are set based on the calendar year. These companies have to adjust their deadlines and ensure that they file specific forms and make payments by May 31st and submit their returns not later than September 15. Generally, the taxation laws require companies to prepare and publish their financial reports annually. However, the reporting period doesnt have to match the calendar year. Note that the annual tax calculation is relevant when it comes to direct taxation like income tax.
The example here applies to the federal government fiscal year. It is the most important fiscal year, especially when it comes to defining its economy. It gives an accurate overview of how the United States' government budget. Its fiscal year runs from October 1st to September 30th. Se the FY statements below:
- The fiscal Year 2020 is between 1st October 2019 and 30th September 2020
- The fiscal Year 2019 covers 1st October 2018 to 30th September 2019
- The fiscal Year 2018 runs from 1st October 2017 through 30th September 2018
Note that the reason why the federal governments fiscal year starts on October 1st is for it to allow the new officials who have been elected to take part in the budget process for their first term in office. A good example is President Donald Trump and the members of Congresss election, which took place in November 2016 and took over the office in January 2017. The Trump administration had its FY 2018 budget on February 27, 2017.
The calendar Year vs. Fiscal Year Choice
In the United States, businesses are free to adopt either a calendar year or fiscal year for the purpose of reporting taxes. For those that opt for a fiscal year, IRS requires them to observe the fiscal tax year when submitting a tax return for their first income. Such businesses are free to switch to a calendar year at any time. However, for those that want to switch from a calendar year to a fiscal year, they must first seek the approval of the IRS. Another alternative is to ensure that they meet criteria specified on Form 1128 Application of Adopt, Change, or Retain a Tax Year.
What is a Tax Year?
A tax year is a fiscal year that applies to most businesses and all income-earning individuals. It begins on the calendar year, which is usually on January 1. In the United States, tax is only due on April 1, which comes 31/2 months later. The reason why April 15 becomes a tax day, is because there was deadline extension by Congress. The extension was to give taxpayers time to pay their taxes. It also gave the federal government enough time to hold on the taxpayers money before they can issue refunds if any.
Does Operating on a Fiscal Year have any Benefits?
Most businesses prefer fiscal year over a calendar year because their business cycle naturally fits well with it. For instance, the school districts follow fiscal years, which runs from July 1 to June 30 because the duration matches the school year as well as the financial-related milestones. However, for retailers, most of their fiscal year ends on January 1. The reason is that December is a festive season and there is an increase in the number of purchases. So, retailers at this time experience high revenue influx. For this reason, they are forced to adjust their fiscal year to January 1. Remember also that some customers usually return unwanted gifts they purchased in December after the festive season is over. So, setting January as their fiscal year helps retailers to generate the correct financial report for tax purposes. Seasonal businesses also adopt a fiscal year to help them in accounting. For instance, some businesses have most of their revenue income during the spring season, and expenses come during winter. So to them, a fiscal year that ends in July or August is more practical than that which ends in December. When a business works with the fiscal year, it can save some dollars on auditing and accounting fees. Note that most companies and business entities, use the calendar year for the purpose of auditing and accounting. At this time, the tax experts are usually on high demand in the months just before December 31. So, those companies that want their financial statements to be audited stand to benefit when they operate under a fiscal year, which does not end on December 31. It means that the accounting professionals are not on-demand, which gives them the ability to negotiate auditing fees.
References for Fiscal Year - FY
https://www.investopedia.com Investing Financial Analysishttps://en.wikipedia.org/wiki/Fiscal_yearhttps://corporatefinanceinstitute.com Resources Knowledge Accountinghttps://www.wallstreetmojo.com Accounting Accounting Basicshttps://marketbusinessnews.com/financial-glossary/fiscal-year-fy/https://www.thebalance.com Investing US Economy Glossary Fiscal Policyhttps://www.myaccountingcourse.com Accounting Dictionary