By: Arlene Meyers
Key Takeaways:
- Q4 is crucial for business owners to clean up financials, ensuring accurate data for tax preparation and establishing a sound basis for 2025 budgeting.
- Important checklist items include reconciling cash accounts, receivables, prepaid expenses, fixed assets, liabilities (e.g., credit cards, loans), deferred revenue, and equity changes to ensure financial accuracy and clarity.
- Accurate record-keeping, including adherence to rules for meal deductions, Form 1099 requirements, and updated vendor information, is essential to streamline the tax process and avoid last-minute complications.
Preparing for Tax Season Can Provide Valuable Data
Now that we’re in Q4 of 2024, it’s time for business owners to put together plans for tying up financials and preparing for tax season. This is the time for making sure the books are clean so you can pass your financial data on to your accountant for tax preparation and analytics. After all, your accountant can’t analyze numbers that aren’t accurate.
Besides assembling the data your tax accountant will need, preparing your year-end accounting checklist provides a bonus – you get a clean set of numbers to use as you create a budget for 2025. Even if you’ve never created a budget for your business, it’s a critical tool to have, and this is a good time to do it. You have nine months of good numbers, and you have a good idea what Q4 will look like.
Remember, a budget is a static document that is based on historical data. A Forecast is a shorter-term, flexible document based on future trends. Ideally, a business owner can use the two documents together to create a financial roadmap for the coming year.
Following is a guide to the key financial areas business owners should focus on for the year-end accounting checklist, including some that are often forgotten:
Balance Sheet
Cash accounts – Look at cash accounts and make sure there’s nothing stale on the books. If a deposit is more than a couple of weeks old, get rid of it; it will never clear. A business generally should not keep deposits on hand that are older than one week. Unless of course the deposits have been recorded and not yet taken to the bank.
Receivables – If you have customers in your 90-days-and-over column, are you able to write off their receivables? Is it likely they won’t pay? Left unattended, the old and uncollectable receivables will skew your financial data as you go into a new year. If you feel the receivables are collectible and you’re having trouble, examine whether your AR process needs to be strengthened.
Prepaid expenses – For businesses on an accrual basis, be sure to identify any prepaid expenses and make sure the cadence has been properly accounted for. Make sure the proper amounts are being written off every month and that the ending balance on December 31 reconciles with the timeline of the prepayment agreement.
Fixed assets – Any single asset valued at $2,500 or more should be capitalized. For example, if you bought a $3,500 computer, it’s a balance sheet item. If you bought 12 computers for $2,000 each, they can be written off as deductions because each individual computer is a single asset value at less than $2,500.
Depreciation – Make sure your depreciation includes the new assets that have been recorded and communicated with your financial or tax advisor to make sure the accountant is computing and writing off the proper amount of depreciation, including weighing the benefits of Sec. 179 and bonus depreciation rules.
Investments – For any investments on the balance sheet, plan to provide your accountant or tax preparer with year-end statements. Make sure the statements accurately reflect the interest and principal.
Liabilities
Credit cards – As with bank accounts, credit cards that have stale charges that have not cleared need to be written off. For example, if there was a $49.75 charge to an office supply store in May, but by October it still hasn’t cleared, it isn’t going to. If it’s a duplicate charge, it can be voided.
Payables – Are they accurate? Anything in the 90- to 120-day column or more should be examined. Why isn’t it paid? Identify the ones that may need to be written off or evaluate whether something is awry with your AP process. You may need help from your accountant or outsourced accounting provider for this.
Loans – Any loans on the balance sheet, either short-term or long-term liabilities, should be documented and reconciled with bank records. Make sure that the proper interest expense and principal payments align with what the bank shows.
EIDL loans – During the COVID-19 pandemic many businesses received Economic Injury Disaster Loans through the U.S. Small Business Administration (SBA). As the government was trying to get money to businesses as quickly as possible, there was little guidance on the breakdown of principal and interest repayments. Many accounting firms – including KRD – created loan repayment schedules for their clients based on their best estimates of what the principal and interest payments should be. But there were several pauses in the program and in the repayments, during which the SBA continued to apply accrued interest to the loans, though borrowers and their advisors were unaware. As a result, the SBA portal used by EIDL borrowers now shows the full principal – as much as $150,000 – owing because all payments to date have been applied to accrued interest. We are advising our clients to create an account on the SBA portal – we will walk you through it – to manage their accounts. Still, the numbers on your loan schedule need to match the SBA’s in order to maintain the integrity of your balance sheet. Your accounting advisor can help you true up these loan schedules by creating a journal entry that records all of the interest and restores the principal balance to match the SBA.
Deferred Revenues
Deferred revenues – Many businesses have deferred revenues because they sell goods and services on a subscription basis, or they sell goods on installment, or they collect money on deposit but roll out their sales in phases. In the accounting world, and traditionally on the accrual basis, revenue is not recognized until a product or service is delivered. Consequently, any balance sitting on a balance sheet in deferred revenue actually represents what is still owed to the customer. For example, a technology company may have been paid $5,000 by a customer for a one-year subscription to its digital software, but by December 31 the customer has used only five months of the subscription. As a result, seven months’ worth of revenues on the balance sheet is offset by the value of the services yet to be delivered to that customer. For year-end accounting, documentation of all such deferred revenue accounts needs to be up to date.
Equity
Changes in equity – If there have been any ownership changes in the company in the past year, your accountant needs to know about them. Ownership changes alter the allocations made to each partner. These are the types of changes that should be communicated to your accountant at any time of the year they occur, not just at year end.
Profit and Loss
Accuracy of accounts – Comb through your expense accounts and make sure nothing is out of place. Payments to your internet provider should not be entered under vehicle expenses. Everything needs to be coded correctly.
Meals and Entertainment
Meals and entertainment (M&E) – The rules regarding business meals and entertainment have reverted to what they were before the COVID-19 pandemic. Business meals are deductible at 50% of cost and must adhere to specific guidelines, including: meals must occur in a restaurant or recognized food establishment (food trucks count, but buying food at a grocery store does not); there must be a documented business purpose for the meal; the taxpayer taking the deduction must be present at the meal; and business meals must be in person (sending food to a client’s office and meeting over lunch on Zoom doesn’t count). As for entertainment, it’s not deductible at any level. So those season tickets to the Bulls games cannot be deducted, no matter how many clients you treat to box seats. However, a meal consumed at the Bulls game does qualify for the 50% deduction, as long as it adheres to the rules described above.
Form 1099
Form 1099 – If you use an accounting platform like QuickBooks Online, Xero or FreshBooks, make sure the data on your vendor accounts is complete – including name, address and Tax Identification Number. Additionally, make sure you have a Form W-9 from each vendor before tax time. You must provide a Form 1099 to any individual and/or vendor who is not a corporation to whom you paid a total of $600 or more during the calendar year. This includes persons or organizations to whom you paid rent, as well as vendors such as attorneys, outsourced IT managers and marketing consultants. Two types of 1099s are most prevalent – the 1099-MISC for rents and other miscellaneous services and the 1099-NEC for non-employee compensation. The deadline for reporting 2024 1099 expenses is January 31, 2025. This means you must send the proper Form 1099 to each vendor and to the IRS by that date. Typically, year-end 1099s are done within about a two-week window in January, so don’t wait until the last minute. Get those W-9s (if they’re missing) and shore up the data in your files now.
Summary
The fourth quarter is a time when financial accounts must be cleaned up and records brought up to date, because tax season is right around the corner. If you have questions or concerns about your financial records as the end of the year approaches, or if you need help with preparation, contact your KRD advisor.
