Written by Dea Johnson, CPA, CITP
Partner, LB Carlson
Have you ever received your tax return, only to be surprised by the end result? Have you ever said to yourself: “I wish I would have known that before the end of the year!”?
When to start:
It’s never too early to start estimating your future financial statements. Here’s how:
- Using your October financial statements as a reference, you can estimate the next two months of activity. For example, if your phone expense through October are $1,780, one-tenth of that is $178, so you can use that for November and December to project your monthly expenses.
- If you’re starting with your October financial statements, you’re probably already a week or so into November. That means you likely already have an idea of any extraordinary expenses that you will have during the last part of 2021 that you can add to your year-end planning.
What to keep an eye on:
- Look over the last two or three years to get an idea of what a “normal” November and December might look like.
- If you have a budget in place, you can also look to see what you have budgeted for November and December.
- Update your fixed asset depreciation schedule to ensure you have all the current year purchases and dispositions reported and the depreciation expense number is accurate.
Year-end objectives:
Now is a good time to look at purchases or expenses you’ll be making before the end of the year, and plan ahead for tax purposes.
- Will you be buying any new equipment before the end of the year? If you need it now or within the first several months of next year, it may be time to look at purchasing it before year-end to utilize the depreciation deduction this year. Because it could take 4 to 6 weeks for the equipment to be delivered, this should be one of the first topics your company discusses. (The equipment needs to be in place by the year end to take the depreciation expense in the current year).
- Are you going to be paying any employee year-end bonuses? Anything you decide to pay to owners or their relatives must be paid before the end of the year to take the deduction. Employees that aren’t related to the owners can be paid their bonus amounts before March 15, 2022 and you can still take the deduction in 2021.
- Think about year-end holiday gatherings. Do you have an annual expense for Thanksgiving recognition that you give to your employees, such as a turkey or grocery gift card? What about holiday gifts or parties you typically budget for?
- Do you offer an employer match for charitable contributions your employees make? If it hasn’t been used, send a reminder email to your employees to submit all requests by a certain date.
- Do you have a retirement or profit sharing plan you have options to fund?
Cash basis taxpayer ideas:
- When starting your tax plan, make sure you understand how to convert your accrual basis financial statements to cash basis.
- If you need the deductions, make sure all your accounts payable invoices are through any approval process and paid before the end of the year.
- Towards the end of December, if you’re expecting an invoice from a vendor for goods or services already rendered, call and ask for the invoice to make the payment.
Additional items to consider:
- Are you low on any supplies you can purchase before the end of the year?
- Do you have obsolete inventory you can sell at a discount or dispose of to take the deduction?
- Do you have any bad debts in your accounts receivable listing that you can specifically write off?
- Have you considered any year end promotional gifts or thank you items to send to your customers or vendors?
- Do you have any W-2 addbacks that need to be calculated and given to your payroll processor? (i.e. Personal use of auto, life insurance, S Corporation SE Health insurance)
Once you have a plan in place, you can update and monitor it as you close out your November month end, and you can make changes up to the last week of the year. If you have a plan and understand the pieces and timing, your tax return should have an “expected result” and not be a surprise.
Aside from knowing and planning for any potential cash needs when you file your 2021 return, you can rest easy knowing you made strategic decisions before the end of the year to maximize your tax situation.