A fiscal year has more to do with accounting than the calendar. Also known as the "financial year" or the "budget year," it spans whatever 12-month period its creator happens to decide upon. The U.S. government, for example, observes it from 1 October through 30 September. In the United Kingdom, it goes from 6 April to 5 April of the following year.
If a business owner is trying to establish a fiscal year period for a new business, the type of enterprise has to be of primary consideration. A hair salon or a auto repair shop, where work tends to be steady and not seasonable, would do just as well to use the regular calendar year, which corresponds with the federal tax year. A retail operation that expects to reach peak traffic at Christmas time, however, would not want to have the end of this calendar — with the resulting scramble to accumulate tax information and prepare a budget for the upcoming year — coincide with the Christmas rush.
The best time for a fiscal year to end is the point at which inventory and business activity are the lowest. A resort hotel chain in South Florida, for example, might set it in August, while a ski resort in Vermont might stop in June. Some tax experts advise ending it on a quarterly benchmark, such as 31 March, 30 June or 30 September. That's because many financial statements, such as payroll, are released quarterly.
The IRS will generally accept any 12-month period as a taxable interval, provided the company fills out an 1120 form stating what the parameters of its fiscal year will be. Once this date has been established, however, it can't be changed for IRS purposes during that calendar year. Since preparing a budget is perhaps the most important task for state and national legislative bodies, governments often use this time period to determine when those lawmakers will be in session.
