12.13.10
Year-End Financial Considerations
by Michael D. Ward
The end of each calendar year is a critical time for many businesses, nonprofit organizations, and individuals. It is the last opportunity to affect tax liabilities, and properly capturing and reporting financial information will impact year-end financial statements and amounts reported in tax and information returns.
For all businesses, including sole proprietorships, coordination of accounting and tax services is critical, from the accounting for and reporting of fringe benefits to owners to the proper classification of business meals, entertainment, travel and other expense reimbursements. The deduction for meals and entertainment is limited to 50% of the amount paid, but meals provided to employees in the workplace and for the convenience of the employer are fully deductible (e.g. bringing in lunch so that employees can keep working, or bringing in dinner for employees working late), as are meals that are fully reimbursed by clients. Track expenses with different tax treatments so that you can report them correctly on tax returns. For tax-saving opportunities, see the related article "A Dozen Year-End Tax Moves for Your Business" contained in the December 2010 Ideas In Action e-newsletter.
For any small business that reports income and deductions on a cash basis, you may consider strategies to shift taxable income to the year in which you will incur the lowest tax rate. If the business is a pass-through entity, the owners need to plan in the context of their individual circumstances. While the inclination may be to simply pay as many expenses as possible to reduce current-year taxable income, should tax rates relevant to the owner increase because of action or inaction by Congress, or should the owner know a large amount of income is likely to be reported and taxed in a future year, it may be advantageous to report income in the current year. With interest rates at historic lows, it is possible that the savings will exceed the “cost of money” by paying tax now rather than in the future.
For a small businesses electing to be treated as an S-Corporation for tax purposes, it is important that the amounts for fringe benefits paid on behalf of greater than 2% owners be recorded properly in the books and on W-2s issued to these individuals. Argy issues an annual Client Alert about fringe benefit items to be included on Form W-2, available on our web site's Client Alert section.
Except for Individual Retirement Accounts (IRAs) and IRA-based plans, most retirement plans need to be in place by December 31st even though they may be funded during the subsequent year prior to filing the return. Plans that must be established by year-end include all 401(k), 403(b), profit-sharing, money-purchase, and defined benefit plans.
For individuals who itemize deductions and are not subject to Alternative Minimum Tax (AMT), be sure to pay all state income tax you expect to owe for the year by December 31st so that it can be deducted on Schedule A. State and local taxes are a tax-preference item and will not decrease Alternative Minimum Taxable Income (AMTI).
Lastly, be sure to secure proper documentation for your charitable contributions. If you donate a non-cash item with a value over $5,000, a qualified appraisal is required to support the full deduction. Be sure to get receipts for donations of household goods and clothing that provide sufficient detail of the donation to properly report the deduction on your return.
For business financial reporting prepared on an accrual basis, a proper year-end cut-off is vital to ensure complete and accurate data about financial results. Be sure to identify costs incurred for which you have not received an invoice as well as income you have earned that you have not yet billed. In addition to capturing all income earned and expenses incurred, the proper calculation of expenses can impact reports. For example, generally accepted accounting principles require lessees with multi-year lease agreements to report rent expense on a straight-line basis by totaling all of the rent due under the lease and dividing it by the lease term to arrive at a flat monthly expense amount. A larger misstatement will result from several months of “free rent” or with longer lease terms. Consult your Argy advisor for technical guidance if you have any large or unusual transactions about which you may be uncertain.
