The year is coming to a close, which means now’s the time to review your books and get ready for tax season (yes, that’s right around the corner).
Before you take a break to celebrate the new year, you have three more things to tackle: year-end reports, maximizing tax deductions and getting a jump on filing taxes. While it might not be the most exciting list of tasks, it will give you a solid idea of your company’s health, reduce your taxable income and give you ample time to file (and pay) taxes.
Let’s get started.
Biz.me is not a legal or tax expert. The following contains general guidelines to help you review your business’s financial health and get ready for the next year. For expert advice, talk to an accountant well-versed in your country’s laws and regulations.
1. Create three year-end reports
Get ready for tax season and take a thorough look at the health of your business over the last year by putting together three reports: a balance sheet, profit and loss statement, and cash flow report. If you have minimal assets and straightforward expenses, you can handle this on your own in a few hours (or less if you’ve kept up with your books). More complex small businesses should consider talking with an accountant to ensure the numbers, and reports, are accurate and thorough.
Balance sheet
Determine the financial health of your business by creating a chart listing your assets, liabilities and equity. Your assets are what your business owns, including your current assets (like your available cash) and your fixed assets (your computer, office coffee maker, etc.). Liabilities include current debt and payments owed to suppliers and service providers. The equity section shows what your business is worth, which is your total assets minus your liabilities.
Need a solid (free) template or deeper explanation? Check out this article from QuickBooks.
Profit and loss statement (income statement)
A profit and loss statement is an itemized list of your revenue and expenses used to determine your net income (which is necessary for taxes). If you’ve kept up with your books throughout the year, this should be easy to put together. Going month by month, list your total revenue (broken down by source) and every expense. By the time you get to December, you should be able to finish up and have a complete profit and loss statement. If you haven’t kept up with your books, you’ll need to dig out those receipts, invoices and sales numbers. Excel has several simple profit and loss templates available.
Cash flow statement
A cash flow statement shows where your money went throughout the year and if there was an increase or decrease in cash flow compared to previous years. When looked at alongside your profit and loss statement, it will show you how your business makes money and how you’re spending it. It includes your business’s:
- Revenue
- Expenses
- Assets purchased
- Assets sold
- Loan(s)
- Loan repayments
Utilize a simple template from Excel or check out this article and free template from QuickBooks.
Interested in finding some new financial tools so you’re ready to create reports come next December? Read through this exclusive Biz.me article: Save time and minimize financial headaches with these four accounting tools.
2. Close out the year with taxes in mind
It’s crunch time: You have until Dec. 31 to reduce your taxable income as much as possible. Because tax laws vary by country significantly, Biz.me strongly suggests talking to a tax professional well before the year ends so you can plan to make strategic expense choices to drop your taxable income.
Here are a few ideas that may help you up expenses responsibly while maintaining a healthy balance:
Start a retirement plan (or max out the contributions to your existing plan). In some countries, contributing to a retirement plan allows you to deduct your contributions from your taxable income. If you don’t have a plan, start one now and contribute as much as possible. If you do, review your country’s max contributions for deductions, look at what you’ve already paid in, and pay as much as possible into the plan before the end of the year.
Buy equipment for your business. If you’ve been saving up for a new computer, software updates, packaging equipment or similar assets, make the purchase by Dec. 31. Depending on the asset, you will likely be able to deduct most or all of the purchase amount.
Sell subpar stocks. If your business currently owns stocks that decreased in value since the purchase, consider unloading them by end-of-year. Most countries have a cap on the amount of loss you can deduct: In the U.S., you can typically deduct up to $3,000 of the losses. So, you’d want to sell $3,000 in losing stocks to net the full deduction.
Delay collecting on billing, and pay up on your bills. For service-based businesses, waiting to send out bills (or invoices) until the end of December pushes the income you’d receive into the following year. Which means you won’t have to pay taxes on it this year. For any business, paying as much toward your current expenses as possible also reduces your tax liability by lowering your net income.
One of the best ways to keep your taxes as low as possible is ensuring your business is structured properly. Check out the first section of this Biz.me article for details: Just starting? 6 legal and financial ducks to line up.
3. Start getting your tax forms ready
Now that your financial information is in order—and you’ve reduced your taxable income as much as possible—get a head start on filing taxes by compiling a list of forms. If this is your first year filing for your business, or your finances are complicated, set up a meeting with an accountant. Bonus: You might be able to deduct the charges from your business income if you pay for the service before the end of December.
Check out these links for filing instructions and information on the forms you’ll need, or go to your country’s taxation department website:
- United States
- United Kingdom: self-employed
- United Kingdom: company
- Australia: company
- Australia: business income
- Canada
Dealing with finances and taxes isn’t exactly the most fun way to close out the year. But taking a close look at your income and expenses over the last year and getting a head start on reporting gets you primed to make next year even more profitable.
