All businesses are required to pay taxes and keep accounting records year by year. You automatically choose your tax year when you file your tax year when you file the first tax return for your business. After that, you have to get IRS permission to change.
The vast majority of small businesses use the calendar year as their tax year--that is, their tax year begins on January 1 and ends on December 31. However, your tax year does not necessarily have to end on December 31. When a business's tax year ends on the last day of any month other than December, it is said to have a "fiscal year."
Ordinarily, sole proprietors, partnerships, limited liability companies, S corporations, and personal service corporations are required to use the calendar year as their tax year. However, there are exceptions that permit some small businesses to use a fiscal year instead. To do so, the business must get permission from the IRS. The IRS doesn't like small businesses to use a fiscal year instead of a calendar year, but it will grant permission if a business has a good reason to do so.
One good reason to use a fiscal year is that your business is seasonal. For example, if you earn most of your income in the spring and incur most of your expenses in the fall, a tax year ending in July or August might be better than a calendar tax year ending in December, because the income and expenses on each tax return will be more closely related.
To get permission, you must file IRS Form 1128, Application To Adopt, Change, or Retain a Tax Year. You may have to pay a fee.
Larger businesses organized as regular C corporations have more leeway in choosing their tax year than most others. They often choose to use to use a fiscal year instead of the calendar year as their tax year. For example, the fiscal year for many C corporations ends in March, June, or September. Such corporations typically choose to use fiscal years for accounting convenience.