Year-End Tax Planning
Keeping your business up and running is hard enough as it is. Throw in the holiday rush and 2020’s unexpected financial ups and downs, and it’s easy to see why your books might be out of order as the year winds down.
But if you want to start 2021 off on the right foot—not to mention keep the IRS happy—it’s crucial to organize your books before the tax year ends. If that sounds like a tall order, don’t worry; no matter what state your books are in now, it’s entirely possible to get them in ship-shape before the end of the year. These three bookkeeping tips can help get you started.
1. Create an End-Of-Year Bookkeeping Checklist
Unfortunately, end-of-year bookkeeping isn’t usually a one-and-done task. Instead, it’s a multi-step process with a lot of moving parts. Creating a step-by-step checklist (personalized to your business and the state of your accounts) can help you track each task. Depending on how organized your books are, your year-end checklist could look something like this:
- Organize receipts, bills, and invoices, and enter all financial transactions for the year you haven’t yet logged.
- Follow up on accounts receivable and accounts aging by following up on unpaid customer invoices or tackling your own unpaid bills before the end of the year.
- Verify that your inventory stock is up to date, especially once the holiday rush dies down.
- Familiarize yourself with this year’s tax codes so you’re prepared to file taxes in April.
- Calculate depreciation on your fixed assets for tax write-offs.
- Reconcile each of your financial accounts, including bank accounts, credit cards, loans, and any other sources of funding.
- Create end-of-year financial documents, especially cash flow statements, profit and loss statements, and balance sheets to review your business’s annual performance and start planning for the new financial year.
Overwhelmed by the sheer amount of tasks organizing your books requires? Realistic, actionable goal setting can help, especially deciding on a date and time to finalize each task.
2. Verify Payroll Taxes and Calculate Employee Bonuses
Payroll taxes are a big deal, and paying the wrong amount will come back to haunt you come April. As you wrap up your books, double-check your payroll tax payments to ensure you’ve paid the right amount this year.
If you used a PPP (Paycheck Protection Program) loan to cover employee paychecks this year, read through the Small Business Association’s list of FAQs to see how PPP loans impact payroll taxes.
And, if you offer employee bonuses based on your business’s end-of-year profits, don’t forget to calculate the right amount of bonus tax withholdings before sending out employee paychecks.
3. Schedule Bookkeeping Time
Bookkeeping isn’t something you can just squeeze in at the start or end of the day—especially not end-of-year bookkeeping. Decide now on a date and time to wrap up your business’s books before December 31st. If possible, try to avoid bookkeeping during business hours. You need an uninterrupted, distraction-free period of time (or several periods of time, depending) to focus on your business’s financials.
Of course, uninterrupted and distraction-free might feel like terms from another era, especially if you’re a sole proprietor working from home or juggling caretaking responsibilities with full-time work. Do whatever you need to focus on bookkeeping for a few hours, from finding a day you can work without distractions to breaking up your distraction-free time into a few 20-minute chunks.
Finalizing your books is hard—especially after a year as trying as 2020. Once you’ve gotten your books in order, reward yourself in whatever way you can, whether that’s bingeing a TV show, baking yourself a cupcake, or simply enjoying a long, hot shower. Seriously: you earned it.
Copyright © 2023 SCORE Association, SCORE.org
Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.