A fiscal year is an annual accounting period of 12 consecutive months ending on the last day of any month other than December, or a 52-53-week taxable year the taxpayer has elected, an annual accounting period being the period on the basis of which a taxpayer regularly computes its income in keeping its books (26 CFR 1.441-1(b)(3) and 1.441-1(b)(5)(i)). The alternative is a calendar year, the 12-month period ending December 31, and the Internal Revenue Code defines each as a period of 12 months, separated by that December ending (26 U.S.C. 441(d) and 441(e)). The label is conditional on the books, because a fiscal year is recognized only if the taxpayer’s books are kept in accordance with it (26 CFR 1.441-1(b)(5)(ii)).
The 52-53-Week Fiscal Year
A taxpayer that regularly computes income on an annual period varying from 52 to 53 weeks, always ending on the same day of the week, may elect to use it. The period has to end on whatever date that day last occurs in a calendar month, or on whatever date it falls nearest to the last day of a calendar month, and once elected it is what fiscal year means for that taxpayer (26 U.S.C. 441(e) and 441(f)(1)).
The two endings behave differently, which a close calendar has to account for. Under the last-occurs rule the year always ends inside the month, on the last day or as many as six days before it. Under the nearest rule it may end on the last day, or as many as three days before or after it, so a year keyed to that rule can close in the following calendar month (26 CFR 1.441-2(a)(2)).
What a Natural Business Year Is
Natural business year is a defined term, not a rule of thumb, and it is the term that matters when a corporation asks to change its annual accounting period. For a corporation, a year end satisfies the test when gross receipts from sales and services in the last 2 months of the 12-month period ending with it are 25% or more of gross receipts for that whole 12 months, and the same computation holds for each of the two preceding 12-month periods. It still fails if some other annual accounting period produces a higher average of those three percentages (Rev. Proc. 2006-45, section 5.04).
Fiscal Year, Tax Year and the Federal Fiscal Year
Tax year is the wider term. A taxpayer’s taxable year is its annual accounting period where that period is a calendar year or a fiscal year, or the period the return covers where the return is made for less than 12 months (26 U.S.C. 441(b)). It is the calendar year where the taxpayer keeps no books, has no annual accounting period, or has one that does not qualify as a fiscal year (26 U.S.C. 441(g)). A fiscal year is one kind of tax year, while a calendar-year client and a client filing a short period each have a tax year and no fiscal year. Where the Code requires a particular taxable year, that required year outranks the annual accounting period the books are kept on (26 CFR 1.441-1(b)(1)), and a personal service corporation’s required year is the calendar year unless it establishes a business purpose for a different one (26 U.S.C. 441(i)(1)). A partnership, S corporation or personal service corporation may elect to have a taxable year other than its required one (26 U.S.C. 444(a)), and which year a partnership or an S corporation is required to use in the first place is set out in year-end accounts outsourcing.
The reporting regime defines the word its own way. Under Regulation S-X, the SEC’s rules on the form and content of financial statements, fiscal year means the annual accounting period or, if no closing date has been adopted, the calendar year ending on December 31 (17 CFR 210.1-02(k)). A December year end is a fiscal year there and is not one under the Code. The two spans cover the same months for most clients, but they are separately defined terms, and how the reporting one governs the statements sits in the income statement.
The federal government’s fiscal year is a third thing, fixed by statute rather than chosen. The fiscal year of the Treasury begins on October 1 of each year and ends on September 30 of the following year (31 U.S.C. 1102), and it is designated by the calendar year in which it ends (GAO, A Glossary of Terms Used in the Federal Budget Process). A client’s own fiscal year bears no relation to it.
What a Non-December Year End Changes
Once the year end moves off December, two things move with it and one does not. The return dates are the same counting rule started from a different month, worked out date by date in IRS business tax filing deadlines. The heaviest close lands in a month that is not January, and what that close involves is in the month-end close checklist. The year end fixes the boundary and not what falls inside it, because the accounting method decides which period an item belongs to, and those tests are in accrual accounting.
Quarters Run From the Fiscal Year’s Own Start
A fiscal year’s quarters are counted from its own first month rather than from January. The SEC’s quarterly reporting rule is written that way. Subject to the exceptions in that section, an issuer with securities registered under section 12 of the Securities Exchange Act that files its annual reports on Form 10-K must also file a quarterly report on Form 10-Q for each of the first three quarters of each fiscal year (17 CFR 240.13a-13(a)). A fiscal year beginning in July therefore has its first quarter in July, August and September. A year ending in June is simply one of the month ends other than December that the definition allows, not the fiscal year.
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