There’s a chill in the air and Thanksgiving is just around the corner, which means we are rapidly approaching year-end. Yes, as you start to get ready for the magic of the holidays, it’s also time to get ready for the financial year-end wrap up and new year planning.
Closing Out the Year
First, let’s tackle closing out the year. While we technically still have two months to finish the year, the prep work you do now will make your year-end close process much smoother. The two areas I focus on can be grouped into two categories:
- Reports to run
- Tax burden considerations
Reports to Run to close the Year
- Payroll Address Verification – Avoid the chaos in January by running a payroll report now to verify that you have correct addresses for all employees. Verifying this information now will make the process of sending out W2’s much smoother and will ensure that your employees get the information they need to do their taxes.
- Vendor Report – Have you added new vendors in 2022? If so, verify that you have their W9s on file and that their EIN or Social Security Number in your accounting software.
- 1099 Report – You will need to provide a 1099 to all vendors that have been paid over $600 in 2022. Run a report to identify all vendors that fall into this category and review to make sure that you have captured everyone and that you have up-to-date information on file.
Considerations for Lowering tax burden
- SEP IRA contributions – if you are self-employed and/or a small business owner, you can contribute up to 25% of your compensation to your SEP IRA account. Retirement and pension plans are tax deductible to the person or business funding it, so by contributing more to your retirement account, you are reducing your liability now and increasing your future wealth.
- Year-end purchases – If you have had a great year financially, now may be a good time to look at what purchases make sense to make before year-end. Making equipment or building upgrades and stocking up on supplies can not only prep you for the next year but may also help lower your tax burden for this year.
- Filing an extension? – This is a big question that is worth discussing with your tax accountant. Extensions are not only for those that can’t meet the return deadline. Extensions can be a strategic move to ensure you have all the information you need to properly file and get all tax benefits possible. Do keep in mind that while an extension gives you more time to file, it does not give you more time to pay your tax liability if you do have one.
As with any tax-related issues, be sure to talk to your tax accountant to discuss the details of your individual situation.
Prepping for the New Year
As you likely noticed, prepping for year-end naturally leads into prepping for the new year. Be sure to consider your key financial reports as you are looking at building your 2023 budget.
YTD P&L
- New Trends – Review your individual line items and identify any trends that will affect the upcoming year. The past few years have been unusual for most businesses, so reviewing line items individually regularly can help identify trends that may not have been imaginable months ago.
- Budget variances – If your profits are lower than expected, now is the time to make changes as you head into the new year. Conversely, if your profits are higher than expected, now is the time to make larger purchases that you can record future depreciation and/or expense in the current year.
Cashflow Statement
Ideally, you are analyzing your cash flow statements throughout the year to identify cash flow trends. At year end, I highly suggest you analyze cash flow by separating your cash flows into three specific activities:
- Cash flow from operating activities (revenue and expenses)
- Cash flow from investing activities (assets purchased and assets sold)
- Cash flow from financial activities (loans and repayments)
The reason behind separating your cash flow into these three categories is so that you have a clearer picture of where your revenue is coming from. Will you be able to continue this activity into the new year or was the cash tied to one-time transactions? Being able to better forecast cash flow activity will help you in establishing a solid budget for 2023.
By focusing on year-end preparation now, you can avoid the chaos of chasing information later. Be sure to work with your accountant/bookkeeper to review your numbers so that you can make the best decisions for you and your business as you move into 2023.
If you have any questions about your financial reports or accounting processes, contact us at 505-850-3908 or estelaoms@tallyupaccounting.com.