When a business generates a financial transaction, it creates a paper trail. This paper trail is called a “Source Document.” Your bookkeeper or accountant may ask you to provide them with some sort of source document to verify data and record transactions correctly. A good source document should describe the basic facts of the transaction such as the date, the amount, the purpose, and all parties involved in the transaction. 

Some examples of source documents include:

• Bank Statements
• Payroll Reports
• Invoices
• Leases & Contracts
• Check Registers
• Purchase Orders
• Deposit Slips – not included on a bank statement
• Check Copies – not included on a bank statement
• Evidence of a Sale or Disposal of an Asset
• Credit Card Statements
• Amortization Schedules
• Sales Tax Returns

The source document is a good internal control and provides evidence a transaction occurred. Providing source documents to your bookkeeper or accountant in a timely manner assists them in preparation of financial statements and accurately analyzing your business activity. 

In the Accounting Services Department at Stockman Kast Ryan + Co, we take a balance sheet approach when closing a set of books. This means each account on the balance sheet (assets/liabilities and equity) is reconciled to source documents (bank statements, amortization schedules, payroll and sales tax returns, etc.) before closing the net income for the year. We view all the transactions during the year to capture any reclassifications that may need to be reallocated to a different account as well as reconciling expenses such as payroll. 

There are many things to take into consideration when finalizing a Year End Closing.

Here are some tips for closing your books:
 

1. Make sure all cash/bank/checking accounts are reconciled. Pay special attention to stale checks or old deposits that have not cleared the bank and investigate the problem.
2. Reconcile your Accounts Receivable and Accounts Payable. Make sure all invoicing and bills are posted (especially if you’re on an accrual basis — income/expenses are recognized when they occur rather than when received/paid). Be sure all payments have been applied to open invoices.  
3. Reconcile all credit card accounts and statements. Expenses charged to a credit card should be dated when charged NOT when the statement is paid. For example, if you charged expenses in December but the statement doesn’t come until January, you can still capture those expenses in the current year.
4. Get ALL cash receipts to post. If there were payments paid from the owner that related to business, they would be applied to their “Owner Contribution” account. That would reduce their personal cash payments and increase expenses.
5. If you have loans on your balance sheet, request a year-end report with the balance from the bank or lending institution to make sure they match. If they don’t balance each other, it is typically due to interest expenses. You can create a journal entry, posting the interest to your expense account, thus adjusting the amount of your loan amount to the actual balance on the bank records
6. Prepare and file 1099s. Hopefully throughout the year you have collected the W9 information on all of the contractors. If you have not, they need to be finalized and postmarked to the contractor no later than January 31st.
7. Prepare and file W2s. This may be done by your payroll service provider, but if you prepare your own payroll reports the W2s need to be finalized and postmarked to the employee by January 31st.
8. Print out a YTD General Ledger. Go through each account and review everything in it. Make sure that each cash and loan account (checking, receivables, payables, notes, inventory and fixed assets) has backup documentation to prove that their balances are correct. Review your income and expense accounts and verify that all of the transactions are posted to the correct accounts. 

Common information we will require from you to prepare your tax return:

• Back-up or portable company file of QuickBooks (Accountant’s Copy if changes are expected to be returned and imported). If the file is not supplied, we need hard copy reports for the current year of the Balance Sheet (Current Year/Prior Year if available), Income Statement, Trial Balance, General Ledger, AP Aging and AR Aging from the accounting system
• Documentation for bank loans/account balances as of year end
• Sales tax liability as of year end
• Year End Payroll Reports (Payroll Summary)
• YTD Payroll Tax Returns (Quarterly 941s, 940, State tax forms)
• Copies of W3/W2s
• Health Insurance Premium total paid for owner or S-corp shareholder
• Inventory balance at year end
• POS Sales Report 1/1–12/31
• Donations (amounts, descriptions and charitable organizations)
• 1099s Received (also, 1099s issued)
• Fixed Assets — Details on any equipment purchased or sold/disposed of, including purchase date, total cost, description, and any financing associated with the asset.  Also include date of sale and amount received when disposed of as well as any trade associated with the disposal.

Generally, we will make the final year-end adjustments to the balance sheet to zero out the owners’ distributions/draws for the upcoming year as well as to record depreciation. Occasionally, we have additional tax adjustments that may also affect your books.

We know that closing out your books for the year can be a daunting task. But taking the time to prepare now will likely save you both time and money later. “Clean” books make the tax preparation process that much easier and efficient. If you have questions regarding any of the suggestions listed here, please let us know. 

Filing Deadlines

Penalties

Additional Notes on Forms 1099

Filing Deadlines

Penalties

Additional Notes on Forms 1099

Good News Bad News

Important Considerations

• Effective tax planning requires a multi-year approach to make sure that strategies intended to save 2016 taxes won’t cost additional money in future years.
• Practices, particularly those that operate for tax purposes as flow-through entities, must consider the effects of their tax strategies on the individual owners as well.  

Defer or Accelerate?

Section 179 Expensing and Bonus Depreciation

• Property must be “placed in service” prior to December 31, 2016 in order for the property to be eligible for the Section 179 expense deduction.  
• Section 179 deductions may be limited if your practice has a loss for 2016, so be sure to contact your tax advisor to determine the tax benefit from using the Section 179 deduction. 

We can help

Shopping, anyone? If your business is in need of office equipment, computer software or perhaps an HVAC system, the purchase you make today could provide you with a tax break tomorrow — or, more specifically, when you’re ready to file your 2016 taxes. The Section 179 expensing deduction remains a solid potential tax-saving value for today’s companies.

Expensing your buys

Sec. 179 of the Internal Revenue Code allows businesses to elect to immediately deduct — or “expense” — the cost of certain tangible personal property acquired and placed in service during the tax year. This is instead of claiming the costs more slowly through depreciation deductions. The election can only offset net income, however. It can’t reduce it below $0 to create a net operating loss.

The election is also subject to annual dollar limits. For 2016, businesses can expense up to $500,000 in qualified new or used assets, subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeds $2 million.

Improving real property, too

The expensing limit and phaseout amounts would have been far lower had Congress not passed the Protecting Americans from Tax Hikes Act in late 2015. The new law made the limits permanent, indexing them for inflation beginning this year. It also makes permanent the ability to apply Sec. 179 expensing to qualified real property, such as eligible leasehold-improvement, restaurant and retail-improvement property.

Finally, the new law permanently includes off-the-shelf computer software on the list of qualified property. And, beginning in 2016, it adds air conditioning and heating units to the list.

Considering all options

You can use Sec. 179 expensing for both new and used property. A related tax break, bonus depreciation, applies only to new property. Be sure to consider all options when purchasing assets. Questions? Please call us — we can help you identify the right depreciation tax breaks for your business. 

A great deal of attention is paid to individual tax identity theft — when a taxpayer’s personal information (including Social Security number) is used to fraudulently obtain a refund or commit other crimes. But businesses can also be victims of tax identity theft.

Significant consequences

Business tax identity theft occurs when a criminal uses the identifying information of a business, without permission, to obtain tax benefits or to enable individual identity theft schemes. For example, a thief could use an Employer Identification Number (EIN) and file a fraudulent business tax return to claim a refund or refundable tax credits. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for the “employees” to claim refunds.

In many cases, businesses don’t even know their information has been stolen until they’re contacted by the IRS. The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation.

Signs your business could be a victim

There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if you receive:

• A notice from the IRS about fictitious employees.
• An IRS letter stating that more than one tax return has been filed in your business name.
• A notice from the IRS that you have a balance due when you haven’t yet filed a return.

Steps to take

If you receive a letter or notice from the IRS that leads you to believe someone fraudulently has used your business EIN, respond immediately to the contact information provided. Contact us for more information about how to proceed.

We are quickly approaching the end of 2016. Now is the time to consider some year-end tax savings strategies for your business, before the year – and the opportunity – slips away.

Good News Bad News

The good news is that we have more certainty from a tax perspective this year because Congress made permanent many long-favored tax breaks (called extenders) late last year. The national elections, however, bring a fair amount of uncertainty to tax and financial planning.

Important Considerations

No matter the results of the election, though, there are important considerations to keep in mind as your business plans for year-end:

• Effective tax planning requires a multi-year approach to make sure that strategies intended to save 2016 taxes won’t cost additional money in future years.
• Businesses, particularly those that operate for tax purposes as flow-through entities, must consider the effects of their tax strategies on the individual owners as well.  

Defer or Accelerate?

Since tax rates in 2016 and 2017 are the same, in many cases it might make sense to plan ahead to defer income into 2017 and accelerate deductions into 2016. You will, of course, need to confer with your business tax advisor and take into consideration your tax accounting method and other elements of your tax planning process.

Section 179 Expensing and Bonus Depreciation

If you are contemplating the purchase of business assets, consider using the Section 179 expense deduction to claim significant write-offs for the cost of new and used equipment, software additions, and improvements to interiors of leased nonresidential buildings. The maximum amount of qualifying property that a business can expense for 2016 is $500,000. If the total of qualifying property purchased in 2016 exceeds $2,010,000, the amount of the Section 179 limitation is reduced dollar for dollar equal to the amount of excess purchases.

A couple of cautions to keep in mind: 

• Property must be “placed in service” prior to December 31, 2016 in order for the property to be eligible for the Section 179 expense deduction.  
• Section 179 deductions may be limited if your business has a loss for 2016, so be sure to contact your tax advisor to determine the tax benefit from using the Section 179 deduction. 

The 50% bonus depreciation deduction is also available for new property purchased in 2016. The combination of Section 179, 50% bonus depreciation and normal first year depreciation provides significant possibilities for reducing taxable income.

There are many factors that go into the decision to acquire business assets—many of them non-tax factors. However, the Section 179 deduction and other depreciation deductions should play a role in your decision making process and could enable your business to obtain property you need earlier and at reduced after-tax costs.

We can help

If you are uncertain about what steps make sense for your business to take before year-end, call us. We can discuss your particular situation and offer advice on what makes sense for you and your business.

If you have incomplete or missing records and get audited by the IRS, your business will likely lose out on valuable deductions. Here are two recent U.S. Tax Court cases that help illustrate the rules for documenting deductions.

Case 1: Insufficient records

In the first case, the court found that a taxpayer with a consulting business provided no proof to substantiate more than $52,000 in advertising expenses and $12,000 in travel expenses for the two years in question. 

The business owner said the travel expenses were incurred “caring for his business.” That isn’t enough. “The taxpayer bears the burden of proving that claimed business expenses were actually incurred and were ordinary and necessary,” the court stated. In addition, businesses must keep and produce “records sufficient to enable the IRS to determine the correct tax liability.” (TC Memo 2016-158)

Case 2: Documents destroyed

In another case, a taxpayer was denied many of the deductions claimed for his company. He traveled frequently for the business, which developed machine parts. In addition to travel, meals and entertainment, he also claimed printing and consulting deductions.

The taxpayer recorded expenses in a spiral notebook and day planner and kept his records in a leased storage unit. While on a business trip to China, his documents were destroyed after the city where the storage unit was located acquired it by eminent domain.

There’s a way for taxpayers to claim expenses if substantiating documents are lost through circumstances beyond their control (for example, in a fire or flood). However, the court noted that a taxpayer still has to “undertake a ‘reasonable reconstruction,’ which includes substantiation through secondary evidence.”

The court allowed 40% of the taxpayer’s travel, meals and entertainment expenses, but denied the remainder as well as the consulting and printing expenses. The reason? The taxpayer didn’t reconstruct those expenses through third-party sources or testimony from individuals whom he’d paid. (TC Memo 2016-135)

Be prepared

Keep detailed, accurate records to protect your business deductions. Record details about expenses as soon as possible after they’re incurred (for example, the date, place, business purpose, etc.). Keep more than just proof of payment. Also keep other documents, such as receipts, credit card slips and invoices. If you’re unsure of what you need, check with us.

Microsoft offers nonprofits free cloud services

Microsoft’s philanthropic arm has announced that it’ll donate $1 billion in cloud computing resources over the next three years to nonprofits and nongovernmental organizations worldwide. The donation is part of an initiative that includes providing a suite of Microsoft cloud services, expanding access to cloud resources for 900 faculty researchers at universities and reaching 20 underserved communities in 15 countries with broadband connectivity and cloud services. 

Microsoft’s goal is to serve 70,000 nonprofits through one or more of the offerings in its cloud services suite by the end of 2017. The company will focus on increasing that number in subsequent years. Nonprofits must work through TechSoup (Microsoft’s partner in the donation program) to satisfy a variety of eligibility requirements to participate. To determine if your organization is eligible, visit http://bit.ly/1RSECd2.

Report details volunteerism efforts 

According to the annual “Volunteering and Civic Life in America” report issued by the Corporation for National and Community Service and the National Conference on Citizenship, approximately one in four Americans, or 25.3%, volunteered with an organization in 2014 — which has remained relatively constant since the increase reflected after 9/11. 

In addition, 62.5% of Americans engaged in informal volunteering in their communities, helping neighbors with tasks such as watching each other’s children, shopping or house sitting. Notably, the research also found that volunteers are almost twice as likely to donate to charity as nonvolunteers. Almost 80% of volunteers donated, compared with 40% of nonvolunteers.

Your organizations can use information in this report to help fine-tune your volunteer program. To keep your numbers healthy, you also can find out more about your volunteers’ skills and interest, and assign them to tasks accordingly. And you can offer incentives for volunteering, such as greater recognition and free admittance to your events.

Public confidence in nonprofits varies

A survey conducted by the Chronicle of Philanthropy — the first to measure public confidence in charities since 2008 — has found that two-thirds of Americans have a fair amount of confidence in charities. More than 80% indicated that charities do a “very good” or “somewhat good” job helping people.

A significant number of respondents, however, expressed concerns about charities’ money management.  One-third said charities do a “not too good” or “not at all good” job spending money wisely, and 41% said their leaders are paid too much. Notably, half said that, when deciding where to donate, it’s “very important” to know that charities spend a low amount on salaries, administration and fundraising. And 34% said such knowledge is “somewhat important.”

Consider these statistics when you complete your next Form 990 or draft your next annual report. Are you clear about how you help your constituents while you manage your nonprofit’s money wisely?