Year-end tax planning strategies for small businesses

A common but unfortunate misconception that many founders have is that accounting and tax are concepts to be discussed sparingly – perhaps just once a year – and not as a part of a year-round strategy. This frame of mind often leads to missed or not-fully realized opportunities due to a late start on planning. In our work with clients across various segments of the Consumer Products Goods (CPG) industry, we’ve identified some common themes and planning opportunities that help business owners just like you. 

Taking Stock of Actuals vs. Projections  

One of the activities that tends to yield real benefits is taking stock of financial projections and comparing them with actual numbers around mid-year or the third quarter mark. This exercise usually brings items to the forefront that are either planning and savings opportunities or additional compliance responsibilities that have come about as a result of the year’s activities. An example of this for a cash basis taxpayer is to accelerate expenses or defer shipping to reduce taxable income for the current year. For accrual basis taxpayers, a mid-year review is often helpful to make sure trade spending is appropriately classified and accrued not only for the company’s tax returns, but also for internal purposes so the company can determine if its gross profit is appropriately being presented. Also, if a company is looking for debt or equity, having accurate numbers for potential due diligence is a priority.  

Additionally, filing requirements often become more complex as businesses grow. Communicating with advisors about sales by state (even those at trade shows) is vital, as an uptick in activity in a given state may trigger sales tax responsibilities. If new employees have joined the company, or new warehouses or facilities have come into the picture, these can also prompt income tax responsibilities. An accurate understanding of a company’s filing requirements can help founders avoid surprises (with needs such as cash flow or liquidity) later on and make additional planning opportunities possible. These small details may not seem overly significant, but having all the compliance ducks in a row often makes a huge difference when trying to secure capital from lenders or investors. 

Put Money Back in Your Pocket with Applicable Tax Credits and Incentives 

Due to ever-changing laws and a steady stream of initiatives aimed at helping businesses, keeping up with money-saving opportunities can seem challenging for business owners. For this reason, leveraging accounting and tax advisors, who ideally have knowledge that extends beyond understanding the current laws to the specific ways businesses in this industry can leverage them, can present a considerable advantage. Often, companies can pursue tax credits and other incentives for activities that they had already planned to do, and having regular discussions and open lines of communication allows advisors the opportunity to plan around them and pursue any incentives for which the company is eligible. Specific examples of endeavors that may make businesses eligible for tax credits or incentives include (i) implementing retirement options or employee benefits plans (such as a 401k), (ii) moving locations, (iii) acquiring manufacturing equipment and (iv) hiring personnel that fit specific profiles. Research and development credits may also be available if a company is creating new products or making improvements to products or business processes, which in some cases may result in a refundable amount of payroll taxes.  

Think Strategically About Year-End Numbers 

As the year comes to a close, so should a company’s books and records. When getting ready to do a hard close for the year-end, businesses should pay close attention to when revenue is recognized based on when the title of the inventory passes to customers. More importantly, businesses should also be sure to accrue for the trade spend for these sales in the following year. In our work with clients, Anchin typically sees the deductions come through within one to two months after the sale. Additionally, looking for expenses that should be accrued at the end of the year is an integral part of the company’s year-end close. By performing these closing procedures, the financial books will be more accurate, allowing owners and executives to make better business decisions.  

Understanding Filing Deadlines and their Respective Windows 

IRS filing deadlines may sound like a hard due date, but there are specific windows within which a business return must be filed, and that specific window depends upon the company’s entity structure. If filing a partnership return, the filing due date is two and a half months from the company’s year-end. If it is a C-Corp, the due date is three and a half months from the company’s year-end date.  

Final Pro Tip, Right This Way 

Companies that converted to a different entity type in the current year should know that their filing deadline would be accelerated based on the conversion date.  

Any deadline can induce a sense of panic, but understanding the specific rules governing IRS filing deadlines can offer some peace of mind. 

By incorporating these concepts and practices into their mid-year record-keeping routine, company founders and executives can set themselves up for a more efficient and stress-free year-end. We highly recommend businesses surround themselves with advisors who are always available to help throughout the year and regularly leverage their intel and experience to assist them in maximizing savings and achieving their strategic objectives.  

To learn more about mid-year planning or to discuss any topics covered in this article, please contact Megan Klingbeil, Partner, or Brent Lessey, Partner and Tax Leader, of Anchin’s Consumer Products Group. 

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