Welcome to the fourth quarter! Business year-end is an incredibly busy time, and we highly recommend getting a jump start on closing out your books for the year so you can enjoy the holidays in peace and know you’re prepared for tax season. We’ve put together a list of items that tend to be misunderstood or forgotten around this time of the year to help you get a jump on your year-end accounting.
1. Understand your tax burden so you can make investments as needed.
No one wants to be surprised with a big tax bill in April. By completing a tax projection, you can get a sense of where you are for the year and what you may owe by the end. You’ll use your current income and expenses to make a projection for the remaining months. If you’ve had significant business profits, it may make sense to invest back into your business at this time. A tax projection is the first step to knowing where you stand thus far. From there, you can see whether you can and should invest in growth, new equipment, etc.
We can help you with tax projections and planning. Contact us for a free consultation.
2. Ensure you have a complete picture of your taxable income.
Many business owners who’ve closely watched their P&L reports throughout the year are surprised by their taxable income. Remember, personal expenses paid out of the business account and shareholder distributions don’t show up on your P&L, but they do move money out of your bank account—and they count toward your taxable income. Loan principal payments can also be misleading. If you’re making payments on an asset that you’ve already depreciated, those payments aren’t deductible expenses (although the interest is a valid deduction).
Remember, there’s more to understanding your taxable income than what shows on your P&L statement. Again, a tax projection can give you a more accurate representation of your total financial picture for the year.
3. Clean up and reconcile your books.
Nine months of the year have come and gone. If you haven’t locked down your books for January through September, take the time to do so now. Don’t forget to:
- Post adjusting entries from prior years if necessary: If you’ve uncovered a past mistake that needs to be corrected in your books, take care of it now in this year’s books. Never change a past year, unless you’re amending that year’s tax return.
- Reconcile both bank and credit card accounts. Hopefully, you’re used to reconciling bank statements. Are you doing the same for your business credit cards? Although you pay credit card balances in a monthly lump sum, the individual expenses should be booked to the proper accounts.
- Reconcile loan balances against statements.
4. Start organizing documents you’ll need at tax time.
If you’ve made significant purchases in the past year, collect and organize the documents your accountant will need to create a depreciation schedule. Don’t forget to include documentation of related loans. It’s also a good idea to create a folder for the tax mail that you’ll receive in January. Did you pay any contractors over $600? Collect the information you’ll need to file 1099s in January.
5. If your business is an S-Corp, notify your payroll company of your owner benefits.
S-corp shareholders who hold 2% or more of the company need to report their benefits (health insurance, auto insurance, etc.) on their W-2s. If your payroll company handles these, make sure they’re aware of the appropriate numbers.
6. If you received a Paycheck Protection Program (PPP) loan, meet with your accountant to understand how the loan will impact your taxes.
The forgivable portion of a PPP loan will not count as taxable income. However, the allowable expenses you paid with that forgivable money cannot be deducted—payroll, mortgage interest, rent payments, etc. Depending on how your business performed this year, the PPP loan could end up making your 2020 taxes look different from past years. Meet with your CPA before the end of the year to get a tax projection that includes adjustments for PPP.
Do you need help with year-end accounting tasks?
Check out our downloadable year-end checklist to make sure you’re taking care of the year-end basics. If your books warrant a professional look, contact us to schedule a free consultation.