Closing out the year


 End of year purchases

Any inventory (items for resale) you purchase is not deductible until you sell those items. Some businesses will try to arrange a large purchase of merchandise for resale, mistakenly thinking that will help them reduce taxes, but this does not work. This is true whether you are on the cash or accrual basis. 

If you purchase equipment, computers, furniture, or other tangible depreciable property, you need to remember the “placed in service” rule. Congress has allowed accelerated depreciation and Section 179 deductions, meaning that you can take a deduction for the full amount of such purchases. You can’t deduct depreciable property that you purchase at the last minute and leave sealed in the box.

 Cash or Accrual accounting

If your business is on Accrual Basis accounting, you’ll record income when it’s billed and recording expenses when they are incurred. This means the dates on invoices you send to customers and the dates of invoices your vendors send you are important. There’s not much related to receipts and disbursements that accrual basis taxpayers can do as far as end of year planning; just pay close attention to those dates.

For cash basis businesses, anything you receive from customers prior to December 31st is income for the current year. Payments you make for business expenses before December 31 are deductions in the current year. You are not responsible for the business schedule of those to whom you owe money. In order to take a deduction for a payment you make by check this year, there should be a reasonable chance that the vendor can receive it and deposit it by the end of the year. For credit card payments, the bill from the credit card company will give the date, and you will get credit for any charge posted by December 31.

Which accounts get closed at the end of a fiscal year?

The temporary accounts get closed at the end of an accounting year. Temporary accounts include all of the income statement accounts (revenues, expenses, gains, losses), the sole proprietor's drawing account, the income summary account, and any other account that is used for keeping a tally of the current year amounts. Since the temporary accounts are closed at the end of each fiscal year, they will begin the new fiscal year with zero balances.

The accounts that do not get closed (their balances are carried forward to the next accounting year) are referred to as permanent accounts.