What is Fiscal Year?
A 12-month period used for accounting and tax reporting that may differ from the January–December calendar year.
Definition
A fiscal year (also called a financial year) is a 12-month period that a business or organization uses for accounting and tax reporting purposes. The fiscal year does not have to align with the calendar year — it can start on any date and run for 12 consecutive months. The IRS requires most businesses to file taxes based on their fiscal year; sole proprietors are generally required to use the calendar year unless they formally elect otherwise by filing Form 1128.
Calendar Year vs. Fiscal Year
The calendar year runs January 1 through December 31. The fiscal year is a custom 12-month period chosen to match the business cycle. For example, a company that earns most of its revenue in the winter months might end its fiscal year in March — capturing a full high season in one fiscal year rather than splitting it across two calendar years. The choice matters because financial statements, tax filings, and performance metrics are all reported relative to the fiscal year.
Fiscal Year for Freelancers and Sole Proprietors
Most freelancers and sole proprietors in the US are required to use the calendar year (January–December) for tax purposes — their Schedule C (profit or loss from business) is filed as part of their personal Form 1040 using the calendar year. However, a sole proprietor who keeps books on a fiscal year basis (for example, April–March) may elect to file on that fiscal year by submitting Form 1128 with IRS consent. This is more common for businesses structured as LLCs, S-corps, or C-corps, which have more flexibility.
Why the Fiscal Year Matters
The fiscal year matters because it determines the period over which income and expenses are matched for reporting and tax purposes. A fiscal year aligned with your business cycle gives a more meaningful view of profitability than calendar year reporting. It also affects when taxes are due, when budgets are set, and how performance is measured year-over-year. If you compare revenue from Q1 2025 to Q1 2024, the comparison is only meaningful if the fiscal years are consistent.
Changing Your Fiscal Year
Businesses wishing to change their fiscal year typically must file IRS Form 1128 and receive approval. The IRS generally grants permission if there is a valid business purpose for the change (such as aligning with a significant business cycle, or following an acquisition). Short-year returns are required when changing fiscal years — covering the period between the end of the old fiscal year and the start of the new one. This can create a complex tax situation, so professional guidance is recommended before making the change.