1. Have You Processed All Your Payables?
Ordinary and necessary business expenses are tax deductible (with a few exceptions we’ll discuss later). So one of the most important year-end tasks for AP is getting your deductions in order.
If you’re on the accrual basis the expenses are deductible as incurred. You must get the payables processed and in the system by the end of the year. Focus on the cut-off between the 2009 and 2010 year and make sure all 2009 bills are dated as 2009. On the accrual basis if you record the bill you get a tax deduction even if you haven’t paid it yet.
2. If You’re On the Cash Basis Have You Paid All Your Bills?
If you’re on the cash basis like many law firms and doctor’s offices you have to pay for your expenses in 2009 to receive the tax deduction.
Make sure you book and pay for any 2009 expenses in December. If you’ve received goods or services and have not yet been billed follow up with your vendors so you can process and pay them before December 31 for a deduction in 2009.
3. Is There Anything You Can Pre-pay?
The tax code generally requires that prepaid expenses of an accrual-basis taxpayer be capitalized and deducted when the prepaid benefit has been delivered. There is a 12-month exception to that general rule that allows a taxpayer to prepay for the benefit (e.g. insurance and service contracts) if the benefit to be received does not extend beyond the end of the next tax year. However the accrual-basis taxpayer will not be able to deduct this 12-month prepayment unless the liability for the prepayment is due in the current tax year. For example an accrual-basis calendar-year taxpayer may deduct a prepayment of a service contract for 2010 if they receive an invoice that is due by December 31 2009.
Cash-method taxpayers may deduct prepaid expenses to be received in the following year regardless of whether the amount is due in the current year. If you’re on the cash basis consider prepaying some of your January expenses. For example if health insurance or your company cell-phone bills are due on January 1 why not pay them in December if you have the cash? You’ll get a 2009 deduction.
If there’s a large expense you can prepay but you don’t have the cash on hand consider using your line of credit. Determine if this will be to your benefit by evaluating the interest expense versus the tax deduction.
3. Have You Properly Matched Revenue and Expenses?
Inventory cut-off affects your financial statements so make sure you have a proper matching of revenue and expenses from year to year.
Imagine you’re a widget manufacturer and you received a shipment of special-grade widget blade steel on December 15. You counted the raw material and put it into inventory (so it’s now an asset) but you haven’t received the bill yet. If you haven’t booked the expense there’s no liability to match up with the asset. You’ll then end up with an overstatement of the company’s equity and you typically end up with an overstatement of profit.
In this example you could be billed in January for the steel you received and added to inventory in December. But you must put the payable in December. Call the supplier and track down the invoices while the 2009 books are still open. Before you close the books if you don’t have the bill you still need to book the liability for the goods you’ve received. This applies even if the payment terms don’t require payment until after January 1. If you received the steel and added it to inventory you need to book the liability in the same year.
4. Are You Doing Business With Related Parties?
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