Calendar Year

What Is a Calendar Year?

A calendar year is a one-year period that begins on January 1 and ends on December 31, based on the commonly-used Gregorian calendar.

For individual and corporate taxation purposes, the calendar year commonly coincides with the fiscal year and thus generally comprises all of the year's financial information used to calculate income tax payable.

Understanding a Calendar Year

The calendar year is also called the civil year and contains a full 365 days or 366 for a leap year. It is divided up into months, weeks, and days. The Gregorian calendar is the international standard and is used in most parts of the world to organize religious, social, business, personal, and administrative events.

Calendars are useful for individuals and corporations to manage their schedules, plan events and activities, and mark special occasions in the future. This is especially useful when someone has many commitments and cannot rely on memory alone to keep things organized. The advent of technology has made planning even easier, as calendars are now easily accessible through computers, smartphones, and other personal devices.

Some parts of the world use the standard as well as religious calendars. For example, the Gregorian calendar was adopted in India as the nationwide standard when the British colonized the country. Although most of urban India continues to use it today, devout Hindus in more rural parts of the country may continue to use a different regional, religious calendar, where the beginning and end of year dates differ.

A calendar year for individuals and many companies are used as the fiscal year, or the one-year period on which their payable taxes are calculated. Some companies choose to report their taxes based on a fiscal year. In most cases, this period starts on April 1 and ends on March 31, and better conforms to seasonality patterns or other accounting concerns applicable to their businesses.

Calendar Year vs. Fiscal Year

A calendar year is always from January 1 to December 31. A fiscal year, by contrast, can start and end at any point during the year, as long as it comprises a full 12 months. A company that starts its fiscal year on January 1 and ends it on December 31 operates on a calendar year basis. The calendar year represents the most common fiscal year in the business world.

Large companies, including Google's parent company Alphabet, Amazon, and Facebook use the calendar year as their fiscal year. Other companies elect to maintain a fiscal year. Walmart and Target, for example, have fiscal years that do not coincide with the calendar year.

Switching From a Calendar to a Fiscal Year

Individuals who file using the calendar year must continue to do so even if they begin operating a business, sole proprietorship, or become an S corporation shareholder.

You must first obtain approval from the IRS by filing Form 1128 if you want to switch from the calendar year reporting to fiscal year reporting for your tax filings.

Generally, those who follow the calendar year for tax filings include anyone who has no annual accounting period, has no books or records, and whose current tax year does not qualify as a fiscal year.

Advantages and Disadvantages of a Calendar Year

Perhaps the biggest advantage of using the calendar year is simplicity. For sole proprietors and small businesses, tax reporting is often easier when the business's tax year matches up with that of the business owner. Moreover, while any sole proprietor or business may adopt the calendar year as its fiscal year, the Internal Revenue Service (IRS) imposes specific requirements on those businesses wanting to use a different fiscal year.

One of those requirements is when tax filings are due. The IRS requires businesses to file their taxes on the 15th day of the third month after the end of their fiscal year. So if a company's fiscal year ends on June 30, the business must file its taxes by September 15.

In certain industries, using a different fiscal year makes sense. For example, seasonal businesses that derive the majority of their revenue during a certain time of the year often choose a fiscal year that best matches revenue to expenses.

Retailers such as Walmart and Target use a fiscal year that ends on January 31 rather than December 31 because December is their busiest month due to the holiday season, and they prefer to wait until the holiday season ends to close out their year-end books.

Businesses that solicit investment dollars — whether from venture capital or crowdfunding platforms — may find it advantageous to use a fiscal year. For example, if a business receives a big investment in November or December, but does not begin incurring major expenses until February or March, using a calendar year could result in an onerous tax burden.