Closing off the year is not as simple as setting an out-of-office message if you’re a business owner. There are a number of important steps that help to ensure an accurate accounting close-off. Every step in the process is equally important and failing to follow one of the necessary processes can lead to inconsistencies on the accounting side of your business that could negatively affect your business in the new financial year.
What is an accounting or fiscal year end?
The fiscal year of a business can be referred to as the financial period within which the business tracks its financial data annually. As such a fiscal year-end can be thought of as the annual accounting period of a business. Most businesses follow a calendar year, measuring business transactions between January 1-December 31, but this does not always have to be the case. Some businesses use bespoke dates for financial reporting, depending on various factors that may make it better for them to do so.
Common factors that might influence a business to choose a fiscal year different from the calendar year:
- Seasonality of a business: if you run a seasonal business, or one that is known to have busier periods then it would best serve your business to close your books off just after the high-demand period. This will give you an accurate picture of the finances of your business from high season to high season, creating less clutter in your books should you have run it over the calendar year.
- Incoming investments or funding: if you received funds from investors then it would best serve your books to have a year end that factors in this funding i.e. closing your books off just after the common investment period closes.
- Stock: If revenue from product sales is the main driver of your business then it would best serve your business to close your books off after the high sale season when your physical stock is at its lowest – allowing you to get a more accurate view of the liquidity of your business.
- Tax deadlines: your fiscal year end should also consider important tax dates to ensure that you are meeting the tax obligations for your business. Estimated quarterly tax payments are due on April 15, June 15, September 15, and January 17.
Importance of an accounting year-end
Trying to reconcile all statements to close off your books can be a chaotic period for a business. But, despite the stress it may bring, fiscal year ends offer a great opportunity for business owners to study the numbers and reflect on what worked well for your business and what your business can improve on. Your financial statements tell a story, and diving into the numbers will tell you where to easily cut costs or safely scale your business.
Financial statements to analyze:
- Income statements to help you understand the profits and losses within your business over the course of the year.
- Cash flow statements give you insight into the amount of cash and cash equivalents within your company over the course of the year.
- Balance sheet to show you an up-to-date view of the assets and liabilities within your business.
Tax compliance is an important step in year-end preparation
No year-end is complete without the necessary submissions to the IRS. To help you prepare for the tax side of your business year-end, it is important that you prepare the following tax-related documentation at the different stages of your year-end close-off.
Before the year-end:
- Categorize revenues by state to help you establish your tax commitments to multiple states, if you operate in more than one state.
- Accumulate contractor payments for the year to prepare for the filing of Form 1099.
- Confirm the number of sold or retired assets to ensure accurate reporting for capital gains.
After the year-end:
- Match 1099-Ks issued to the company to match gross revenues as a way of cross-checking income.
- Obtain W-2s/W-3s to declare important remuneration-related information about employees.
- Reconcile all accounts to aid accurate reporting.
After year-end, your bookkeeper will require the following for tax preparation:
- Journal entries and supporting documentation as part of the tax preparation process.
- Depreciation (to account for this in tax submissions).
- Retained earnings to ensure accurate reporting at the next tax deadline.
Tax submissions for every business
No financial year-end is complete without your business paying what’s due to Uncle Sam. Tax submissions are an important part of your fiscal year-end.
Different tax rules apply to different business entities. When filing your taxes, be sure you know which tax forms your business is required to submit.
As a business, you might receive several different forms documenting the income you received. Some common ones include:
- 1099-G forms for unemployment income and state or local tax refunds
- 1099-INT, 1099-DIV, and 1099-B for interest, dividends, and stock sales
- 1099-R and SSA-1099 for retirement plan distributions and Social Security benefits
- 1099-S for income from the sale of your residence or other property
- 1099-MISC for income from a rental property
- 1099-Q for distributions from a 529 plan or Coverdell ESA
- 1099-SA for distributions from a health saving account (HSA)
- Schedule K-1 for income from a pass-through business, trust, or estate
- Alimony received (if your divorce or separation agreement is dated on or before December 31, 2018)
- Records of any transactions involving cryptocurrency
- Information on other sources of income, such as gambling winnings, jury duty pay, cancellation of debt, etc.
The only exciting part about filing your taxes is arguably the fact that you can deduct a number of costs relevant to your business to help lower the tax burden on individuals.
These are some of the deductions your business may be eligible for depending on the structure and nature of your business:
- Child care costs—provider’s name, address, tax id, and amount paid
- Education costs—forms 1098-T, education expenses
- Adoption costs—SSN of child, legal, medical, and transportation costs
- Home mortgage interest and points you paid—Forms 1098
- Investment interest expense
- Charitable donations—cash amounts and value of donated property, miles driven, and out-of-pocket expenses
- Casualty and theft losses—amount of damage, insurance reimbursements
- Medical and dental expenses
- Energy credits
- Home office
- Travel expenses
- Business Meals
- Vehicle payment and taxes
Note that if your business operates across different states, different tax and apportionment laws might apply to you. Read up about multistate taxes to ensure you comply.
At Fusion our CPAs are qualified to help small and large enterprises develop accounting procedures to make fiscal year ends easier to manage. We can also help prepare annual tax returns and analyze recon statements to optimize tax returns.
We can help you set up your accounting software to help you better manage your accounting processes and understand your business finances. Contact us today.
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.