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Preparing for a Painless Year-End

Written by Maria Pearman, CPA, CGMA, Perkins & Co

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Year-end can be exhausting for accounting professionals. There’s the rush to close the books, issue 1099s, distribute W2s, and coordinate the preparation of the tax return with your CPA. I am a CPA specializing in craft beverage and have served as both an external CPA and an outsourced CFO. After seeing both sides of the year-end crunch, here are some suggestions for making the end-of-year process as painless as possible.  

Roll Retained Earnings 

One of the first things your tax preparer will do is compare your retained earnings for last year (12/31/19) to the tax return for the same period. Before closing your books, confirm that retained earnings reflect the last filed return. Common reasons for a discrepancy include not adjusting journal entries that your CPA provided with the prior year return or making changes to transactions in a prior year. By taking the time to ensure retained earnings rolls, you will save your tax preparer time (which, of course, saves you money). 

If you believe retained earnings should be different than what is on the tax return, and if the amount is material, discuss this with your CPA. You may decide it’s necessary to file an amended return.  

Review All Open Transactions

Good year-end housekeeping includes a review of open transactions to make sure only truly outstanding items are showing open status as of 12/31. Accounting should check that all sales orders have been closed, all deliveries have been invoiced, and all A/R invoices are marked paid, as appropriate. The purchasing department should ensure all purchase orders and inventory receipts have been booked and closed. The production department should certify that all open production orders and all batches in process have been closed. If you’re using a business management system like Ekos, all tanks should be “emptied” after every batch. If this step is not done, COGS will be incorrect. 

Providing Information to Your Tax Preparer

Before beginning the preparation of a return, most CPAs will provide you a list of requested items. Be prepared to provide a copy of your comparative profit and loss statement and balance sheet (e.g., 2019 vs. 2020) in Excel. Also provide a supporting document for each account on the balance sheet and include copies of any legal agreements that affect the prior year. 

I strongly recommend having a preliminary meeting with your CPA in November or early December to pre-plan for year-end. This can give you a projection of taxable income and is an opportunity to talk about different tax strategies. In general, it is a forum to think broadly about your company before the pressure of tax season takes over. Once tax season is underway, most CPAs’ attention turns toward completing returns as quickly as possible. 

When preparing returns, CPAs build a folder of source documents that support the tax return. Many of these documents will come from you, the client. Examples include:

  • Bank, credit card, and loan statements
  • Promissory notes and amortization schedules for any private party loans
  • A/R and A/P aging reports
  • Inventory audit reports
  • A detail of changes to fixed assets with a description of purchases

Examples of relevant legal documents are:

  • Subscription agreements for new members added within the year
  • A copy of an amended operating agreement
  • An updated cap table

By collecting these and submitting them with your balance sheet and income statement, you reduce the amount of time that the CPA will spend sending follow-up questions to you. I have found that as a preparer, when I have to pick up and put down a return while waiting on additional information from the client, it dramatically affects my efficiency — which of course results in a higher expense for the client. 


1099s are due to recipients by January 31 and to the IRS by February 28. As a reminder, 1099s should be issued to all service providers to whom you have paid over $600 in the year and who are not incorporated (S corps, C corps). All landlords and attorneys receive a 1099 for rent payments or legal services, respectively, regardless of how much they have been paid or their corporate structure. 

Note that there is a new form for 2020. Form 1099-NEC is for non-employee compensation. Rent and legal fees are still reported on Form 1099-MISC. The amounts that currently reported on Form 1099-NEC were previously reported in Box 7 of Form 1099-MISC. Also, remember that if you pay interest of more than $10 to any individual, a Form 1099-INT should be issued. If you have accrued, but not paid, interest, a 1099 is not required. 

I recommend collecting vendor W9s throughout the year, and for convenience, you can attach the W9 to the vendor profile in your accounting system. A best practice is to require the W9 on file before paying a new vendor.  

Tax Distributions

If your company is a partnership or an S corp, are you required to issue tax distributions or dividends in the event that your company generates taxable income? Many operating agreements include a provision for tax distributions, which is given to investors to cover the tax liability they may incur due to company income allocated to them on their K-1. A tax distribution is not characterized differently from an income distribution. In other words, both are a return of capital to investors, not income. All distributions deplete capital accounts. 

The reason the distinction is important is that some operating agreements have specific provisions about the order in which distributions occur. For example, a common provision is that all investors who provided initial capital for the business will be paid back before sweat equity partners can participate in distributions. However, tax distributions are usually allowed for all investors, even if they would not be allowed an income distribution. Read your operating agreement and understand your obligations for issuing distributions. This could significantly affect cash flow, and most certainly would be an unwelcome surprise. 

As they say, begin with the end in mind. Anticipate questions from your CPA and you will save yourself time and money. With a little organization, you can minimize the chaos of the year-end hustle. 

Written by Maria Pearman, CPA, CGMA, Perkins & Co
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