Year-end planning (beyond filing taxes)

Preparing for the year-end as a business owner, is most often interpreted as: organizing your bookkeeping, and lining up someone to do your taxes. But as the business grows, the bookkeeping is happening year-round, and the same accountant does your taxes, those parts can be on auto-pilot. Leaving room for actual planning.

I remember before owning my own business, hearing of people "stocking up" on a bunch of inventory and large purchases before the end of their business year. As an accountant student at the time, I thought that was odd, as inventory isn't quite an "expense", nor is buying large pieces of equipment.

However, some interpretation of that is applicable. Year-end is a great time to buy supplies (which is not necessarily inventory). And, large purchases do create an expense (through amortization/depreciation) in the year it is purchased; although the deduction won't be equal to the purchase price, it does give a tax benefit right away.

In my business for example, with a September year-end, one of my goals is to reduce my income tax obligations for the year, and to minimize my ongoing tax installments obligation as well. One way to do that, is to minimize the business's net income for the year ended September 30. Additional expenses (so long as they are things I would be buying anyway - insert "it's a write off!" joke) help accomplish this goal.

In my business, September is a great time to re-assess my office supplies; things that aren't very large purchases, but do add up in small quantities. It's a good time to buy things I've been meaning to buy and haven't gotten around to, in order to fit those expenses into the fiscal year, and not only get around to buying them in early October.

Another element to year-end planning is to look at year-to-date revenues and expenses, to estimate profit for the year, and compare to the tax installments that were made. If profit was higher than the prior year, tax installments may not have been high enough, and it gives you a few months to make up the difference (instead of getting a surprise tax bill in 3 months).

And lastly; looking at your numbers right around year-end allows time to re-assess your personal compensation. Many business owners keep their salaries steady for years at a time, or stick to the same salary/dividend mix just because it's what they've always done. However, businesses change, retirement income goals change, and family lifestyle expenses shift over time. Doing the planning work now allows you to have more meaningful conversations with your accountant and/or financial planner, before the busy tax season. And, allows for a meeting that doesn't revolve around looking at a completed tax return (which is nice and all, but doesn't always allow time to get into long-term planning discussions).

If you have been in business for a few years now, formalizing your year-end planning can be a very meaningful practice, especially when done right as the year is ending. Involving your financial planner in this process is very underrated, too. I genuinely enjoy walk through a P&L statement and have salary/dividend compensation discussions. It's odd, I know.