A fiscal year for a business is any 12-consecutive-month accounting period that ends on the last day of a month other than December. A calendar year runs January 1 through December 31; a fiscal year is everything else that fits the 12-month, month-end rule — July 1 through June 30, October 1 through September 30, and so on.1Office of the Law Revision Counsel. 26 USC 441 – Period for Computation of Taxable Income The choice locks in how the business computes taxable income, when its return is due, and when estimated payments must be made.
A business that does not keep books, has no regular annual accounting period, or has one that does not qualify as a fiscal year defaults to the calendar year.1Office of the Law Revision Counsel. 26 USC 441 – Period for Computation of Taxable Income That is why sole proprietors and most individuals end up on a calendar year.
Seasonal businesses benefit most from a fiscal year. A ski resort that earns most of its revenue between November and March might close its books April 30, after the peak has passed. Retailers often pick a January 31 year-end so that holiday sales and post-holiday returns are captured before the year closes.
Who Can Actually Choose a Fiscal Year
Not every entity has a free hand. C corporations have the most flexibility: a new C corporation simply files its first return for the period it wants, and that becomes its tax year. No advance approval is required.2Internal Revenue Service. Publication 538 – Accounting Periods and Methods Partnerships, S corporations, and personal service corporations face real restrictions.
Partnerships
A partnership must generally use the same tax year as the partners who hold a majority of profits interests. If no year commands a majority, the partnership uses the tax year of all its principal partners. If that still gives no answer, the partnership uses whichever year produces the least aggregate deferral of income across all partners.3eCFR. 26 CFR 1.706-1 – Taxable Years of Partner and Partnership Since most individual partners are on a calendar year, most partnerships end up on one too.
S Corporations
An S corporation’s required year is a calendar year ending December 31. The only ways around it are a Section 444 election, a 52-53 week year tied to the calendar year or a Section 444 year, or IRS approval based on a demonstrated business purpose.4eCFR. 26 CFR 1.1378-1 – Taxable Year of S Corporation
Personal Service Corporations
A personal service corporation — a corporation whose principal activity is performing services in fields such as health, law, engineering, or consulting — also defaults to a calendar year, with the same three escape routes.5eCFR. 26 CFR 1.441-3 – Taxable Year of a Personal Service Corporation
The 52-53 Week Variation
Instead of ending on the last calendar day of a month, a 52-53 week year always ends on the same day of the week: the last Friday in June, say, or the Saturday nearest to March 31. Some years contain 52 weeks and some 53.6Internal Revenue Service. Tax Years
The chosen day must be either the last occurrence of that weekday in a particular month, or the occurrence nearest to the last day of that month. A company that picks “the last Friday of June” might end its year on June 27 one year and June 26 the next. Retailers and manufacturers like this format because every reporting period contains the same number of weekends and workdays.7eCFR. 26 CFR 1.441-2 – Election of Taxable Year Consisting of 52-53 Weeks
For deadline purposes, a 52-53 week year is treated as ending on the last day of the nearest calendar month. A year that ends any day from May 25 through June 3 is treated as ending May 31 or June 30, whichever is closer, and due dates are calculated from there.7eCFR. 26 CFR 1.441-2 – Election of Taxable Year Consisting of 52-53 Weeks
The Section 444 Workaround
Section 444 offers a limited option for partnerships, S corporations, and personal service corporations that want a non-calendar year without proving a business purpose. The elected year cannot create a deferral period longer than three months, so an S corporation could elect September 30, October 31, or November 30, but nothing earlier.8Office of the Law Revision Counsel. 26 USC 444 – Election of Taxable Year Other Than Required Taxable Year
The election is made on Form 8716, due by the earlier of the 15th day of the fifth month after the month that includes the first day of the new tax year, or the unextended due date of the short-period return the election creates.
It is not free. Partnerships and S corporations that use Section 444 must make an annual required payment under Section 7519 that approximates tax on the deferred income. The payment equals net base year income multiplied by a rate tied to the highest individual bracket plus one percentage point, and any required payment above $500 must be paid each year the election remains in effect.9Office of the Law Revision Counsel. 26 USC 7519 – Required Payments for Entities Electing Not To Have Required Taxable Year For many businesses, the deferral is not worth the cost.
Proving a Natural Business Year
To get a fiscal year beyond the three-month Section 444 limit, a restricted entity has to prove a business purpose. The usual route is the 25-percent gross receipts test.10IRS.gov. Revenue Procedure 2006-45
Add the gross receipts from the last two months of the proposed fiscal year, then divide by total gross receipts for the full 12 months. Run that calculation for the most recent year and the two years before it. If all three ratios come in at 25 percent or higher, the proposed year qualifies as a natural business year. A Christmas tree farm that earns a third of its revenue in November and December would likely clear the bar for a December 31 or January 31 year-end.11IRS.gov. Revenue Procedure 2002-38
One catch trips people up: you also have to check whether any other potential year-end would produce a higher three-year average. If it would, you cannot claim your requested year — the IRS wants the year-end that reflects the true business cycle.10IRS.gov. Revenue Procedure 2006-45
Adopting or Changing a Fiscal Year
A new C corporation adopts its fiscal year by filing its first return for that period. No form is needed. Any business that later wants to change its tax year, and any restricted entity that needs approval for a non-required year, files Form 1128, Application to Adopt, Change, or Retain a Tax Year.12Internal Revenue Service. Instructions for Form 1128
Many changes qualify for automatic approval. Form 1128 is filed by the due date, including extensions, of the return for the short period created by the change. No user fee, no individual ruling.12Internal Revenue Service. Instructions for Form 1128 Changes that do not qualify require a private letter ruling through Part III of Form 1128, with a user fee that runs into the thousands of dollars.13Internal Revenue Service. Internal Revenue Bulletin 2026-1
The form itself asks for basics: business name, address, EIN, current accounting period, proposed new year-end, and, for a change, the end date of the short period that bridges the gap.12Internal Revenue Service. Instructions for Form 1128
The Short Tax Year Trap
Switching from one fiscal year to another creates a short tax year, a period shorter than 12 months for which a separate return is due. The tax calculation is not simply “report what you earned.”
The general rule requires annualizing income: multiply short-period taxable income by 12, divide by the number of months in the short period, compute tax on that annualized figure, then prorate the tax back down by the same fraction.14eCFR. 26 CFR 1.443-1 – Returns for Periods of Less Than 12 Months Annualization can push income into a higher bracket for the calculation, producing a proportionally larger tax bill than a few months of earnings would suggest.
An alternative method may produce a lower tax. It looks at actual income for the full 12-month period beginning on the first day of the short period, computes the ratio of short-period income to that full-year income, and applies the ratio to the 12-month tax. The tax owed is the greater of that number or the tax on the short-period income calculated without annualizing at all.14eCFR. 26 CFR 1.443-1 – Returns for Periods of Less Than 12 Months Businesses formed or dissolved during the year are generally exempt from annualization and simply report actual income for the period they existed.
How the Fiscal Year Drives Tax Deadlines
The year-end sets every major deadline, and each deadline shifts by the same number of months the year-end differs from December 31.
Return Due Dates
Partnerships filing Form 1065 and S corporations filing Form 1120-S must file by the 15th day of the third month after year-end. C corporations filing Form 1120 file by the 15th day of the fourth month after year-end, with one exception: a C corporation with a June 30 year-end files by the 15th day of the third month, September 15 rather than October 15.15Internal Revenue Service. Starting or Ending a Business A due date that falls on a weekend or federal holiday moves to the next business day.
Estimated Tax Payments
Fiscal-year corporations owe estimated installments on the 15th day of the 4th, 6th, 9th, and 12th months of their tax year. A company on an October 1 through September 30 year would pay on January 15, March 15, June 15, and September 15. Fiscal-year individuals and pass-through entity owners should check IRS Publication 505 for the adjusted schedule that applies to their situation.16Internal Revenue Service. Estimated Tax
Getting the year-end right at formation saves real hassle later. Changing it means filing Form 1128, dealing with a short-period return, and possibly paying a user fee. Working out the operating cycle before filing the first return avoids all of it.