How well prepared a business is to close out the year varies a great deal from business to business, says Nancy E. Supowit, CPA, MAS, director at Clarus Partners. Some don’t prioritize closing or thinking ahead, while others have procedures in place to ensure that closing and planning take place at appropriate times throughout the year.
Smart Business spoke with Supowit about strategies that help businesses and owners stay on top of their financial health.
What should be the focus for businesses in December?
December is a great time for businesses to check their accounting records and make sure that the books accurately reflect business activity and position. It’s also a time to do preliminary work, review year-to-date records to identify trends and unusual activity, and make corrections if needed.
Year-to-date records are a good reflection of the year’s activity and can be used for decision making and year-end planning. Most businesses aren’t able to finalize everything before the new year since they depend on reports that aren’t available until the following year. However, they can check over their own records and year-to-date reports in December so that when the outside reports arrive, there will be fewer surprises and the final entries can be done quickly.
What happens if a business fails to wrap up its current accounting year?
When businesses don’t close the books on time, the owners can’t read the story of the year’s successes and failures. They might need to rush through a late closing for reporting or tax filing purposes and they might incur higher outside accounting bills to accomplish the task.
Owners also miss out on an important tool for understanding their businesses and for decision-making. If accurate records aren’t available in December, the owners don’t have useful information for tax planning.
What do you suggest businesses do to be better prepared for next year’s year-end planning?
Businesses should consider the following:
- Make sure accounting records are in good shape. Read the records and consult with an adviser to suggest tax savings strategies.
- Consider large fixed asset purchases. Businesses can often use accelerated depreciation to reduce taxable income.
- Set up retirement plans to optimize retirement savings for owners and employees. Keogh plans for self-employed owners have to be set up before Dec. 31.
- Consider whether the company can qualify for tax credits such as the Research and Development Credit or Work Opportunity Credit.
- Adjust compensation and year-end bonuses to reflect performance and optimize tax results. This is especially important for owner-employees.
- Communicate fringe benefit information to payroll departments, including S corporation owner health insurance costs.
- Check that board meetings and corporate minutes are up to date and revisit big-picture issues such as line of business, choice of entity and succession decisions.
What do business owners need to do at year’s end to wrap up their financial year?
Business owners should meet with their tax advisers in December to discuss their anticipated tax position. They can:
- Set up retirement plans for self-employed individuals.
- Optimize security sales to harvest gains or losses depending on the year’s results.
- Adjust withholding or the fourth tax estimate to avoid April surprises, including the penalty on underpayment of estimated tax.
- Utilize the annual gift tax exclusion, which is currently $14,000. A married couple can gift another married couple up to $56,000 tax-free.
Utilize your wealth to make deductible charitable contributions or contribute to 529 educational plans for family members. There are many ways to optimize charitable giving, including donating appreciated property. The Columbus Foundation and other organizations offer convenient donor-advised funds.
Insights Accounting is brought to you by Clarus Partners