What is a Calendar Year
A calendar year is the 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 therefore it generally comprises all of the year's financial information used to calculate income tax payable.
BREAKING DOWN Calendar Year
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. However, some companies choose to report their taxes based on a fiscal year, which in most cases start on April 1 and end on March 31, to better conform to seasonality patterns or other accounting concerns applicable to their businesses.
Calendar Year vs. Fiscal Year
A calendar year is always 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 twelve 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 Inc., Amazon.com and Facebook use the calendar year as their fiscal year. Other companies elect to maintain a fiscal year. Walmart and Target Corporation, for example, have fiscal years that do not coincide with the calendar 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.
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, and they prefer to wait until the holiday season ends to close out their books for the year.
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.