When it comes to end of the year tax planning, the most important rule according to accountants and bookkeepers is this: Don’t procrastinate.
“In all instances, we stress meeting before year end,” says Marie McKay, CPA and managing director of UHY Advisors in Manchester. “No one wants surprises. They don’t want to find out in April or March what they owe.”
Cheryl Tocci, owner of Blue Granite Bookkeeping in Hollis, cites other reasons to avoid delay. “The sooner you can get your stuff over to your CPA, it lowers your chances of needing an extension,” she says, “because they are overwhelmed. There is a shortage of CPAs. We had too many retire during COVID and not enough coming out of school.”
With the end of the year approaching, businesses are running out of time to take the necessary steps to ensure a timely tax filing with the most favorable outcome.
“It should start before the end of year,” says McKay. “We meet with our clients in the fall and we project where their income is going to be for the year. We look at the structure of their company and try to calculate what their tax would be and give them some options on different things they can do to minimize tax in the current year and the future year depending on tax policy.”
End of the year accounting is key, but it can’t make up for 11 prior months of poor bookkeeping practices. “The ultimate is making sure you have been doing your books, and if not, contract with someone to do a cleanup and catch up to have you ready for the end of the year,” says Tocci.
Cleaning up means all bank loans and credit cards are reconciled to statements; all inventory is accurate, and cost of goods sold is current.
Matching your company’s accounting records of cash activity with the official records provided by your bank is critical. Before tax planning can even start, “cash has to be reconciled at a minimum,” says McKay.
Varying Degrees of Success
Businesses come to the end of the year with varying degrees of success in preparation. “There are two mindsets in the business owner and entrepreneurial world when it comes to record keeping,” says Tocci. “There are the people who know that’s part of owning a business, and there are other people who say, ‘I just want to make money and the admin will work itself out when I need it to.’ They put the admin stuff to the side and focus on generating income.”
Those in the latter group require the most help at the end of the year, have the greatest chance of a surprisingly large tax bill, and miss out on savings opportunities.
“Some clients require monthly reviews, some quarterly of their numbers,” says McKay, explaining many small business owners are not accountants, and while great at what they do, they wear 10 different hats. “We can provide them with the oversight they need to make numbers accurate and reliable.”
Businesses cover a wide spectrum when it comes to tax planning and compliance. “I have one client now who hasn’t filed since 2017,” says Tocci. “I have another who was with a previous bookkeeper who got him a deadline extension. But it’s a nightmare. Waiting to the last minute creates a higher chance of mistakes.”
A good solution for most businesses is working with a bookkeeper over the course of the year while maintaining a relationship with an accountant or IRS enrolled agent for tax preparation. Enrolled agents are certified to provide tax advice and act as intermediaries between taxpayers and the IRS. “It’s almost as stringent as a CPA, and you have continuing education classes,” says Tocci.
If a separate person does your bookkeeping and your taxes, it’s important that they have regular communication to ensure everyone is on same page. “I talk with the CPAs who deal with my clients on a monthly basis, even more if they are doing tax advisory services instead of just tax filing,” says Tocci. “That’s a separate service; not all CPAs offer tax advisory. I do recommend it to my clients with lots of moving parts. You can get hit hard otherwise.”
Uncertain Landscape
Tax advisory services are especially helpful in maximizing the tax benefits of depreciation and other accounting methods. If a business had a highly profitable year, a good tax strategy might be to purchase some heavy equipment or new technology before year end, even if borrowing is necessary. This is so the depreciation on that new purchase, which is largest in the first year, can be used to defray anticipated tax liability.
Tax advisory is also important in planning ahead to maximize the benefit of anticipated changes in tax law, such as the Tax Cuts and Jobs Act of 2017, which created the qualified business income deduction, worth up to 20% of eligible revenue. That tax break is scheduled to expire
after 2025.
“There’s some uncertainty there,” says McKay. “They can just let it [Tax Cuts and Jobs Act of 2017] expire, and taxes go up. It affects 2024 tax planning because you may decide you want to defer income into future years, so you would take a depreciation deduction or you may decide you don’t want to because you think tax rates are going up.”
To be in the best position to make such decisions, both McKay and Tocci recommend digitizing all tax-related records. “We recommend QuickBooks for small companies, and you can go up from there. There is great software that you can use to scan in receipts, invoices, customer records—everything can be paperless,” says McKay. “You can’t bring in a box of papers and expect us to accept it. We don’t do that anymore.”
Current Issue - January 2025