Year-End Closure for Small Businesses and NPOs: A Tailored Guide

The year-end accounting closure process for small businesses and non-profit organizations (NPOs) is a crucial step in ensuring financial accuracy, tax compliance, and overall organizational health. 

While many general guidelines apply to both types of entities, there are specific considerations unique to each. This blog post will delve into the tailored aspects of year-end closure for small businesses and NPOs.

Accounting For Small Businesses

Inventory Valuation

Small businesses often have physical inventory that needs to be accurately valued. Consider using the FIFO (First-In, First-Out) or LIFO (Last-In, First-Out) methods to determine the cost of goods sold.

1. FIFO (First-In, First-Out): This method assumes that the first items purchased are the first ones sold. It’s generally more appropriate for businesses with perishable inventory or rising prices.
2. LIFO (Last-In, First-Out): This method assumes that the last items purchased are the first ones sold. It can be advantageous during times of inflation as it can result in lower taxable income.
3. Weighted Average Cost: This method calculates the average cost of all units in inventory and applies it to each unit sold.

Depreciation and Amortization

Both of theseare accounting methods used by non-profit organizations (NPOs), small businesses, and other businesses to allocate the cost of tangible and intangible assets over their useful lives. This allows businesses to gradually deduct the cost of these assets as they are used, reducing taxable income.  

Depreciation is applied to tangible assets, such as equipment, machinery, and buildings. The rate at which an asset depreciates depends on its useful life, which is an estimate of how long the asset will be used.

Amortization is applied to intangible assets, such as patents, copyrights, and goodwill. The amortization period for intangible assets is generally shorter than the useful life of tangible assets.

• Simplified Depreciation Method (Section 179): This method allows small businesses to deduct the full cost of certain qualified property in the year during the year-end accounting. This can provide significant tax benefits in the short term.
• Bonus Depreciation: In certain years, businesses may be eligible for bonus depreciation, which allows them to deduct a larger portion of the cost of qualified property in the year it’s placed in service. 

For example, If a small business purchases a new piece of equipment for $100,000 in a year when the Section 179 limit is $100,000 and the bonus depreciation rate is 100%, the business can deduct the entire $100,000 in the year of purchase.

• Useful Life Estimates: Accurately estimating the useful life of assets is crucial for proper depreciation and amortization. Factors to consider include the asset’s nature, the business’s usage patterns, and any expected obsolescence.

Business Mileage

If you use your personal vehicle for business purposes, keep a detailed log and deduct the standard mileage rate or actual expenses.

Home Office Deduction

If you operate a home office, you may be eligible to deduct a portion of your home expenses. However, specific requirements apply.

Accounting For Non-Profit Organizations (NPOs)

Donor Stewardship

• Accurate NPO bookkeeping: Maintain detailed records of all donor contributions, including the amount, date, and donor information for accurate final accounts for non-profit organizations.
•  Acknowledgment: Timely and appropriate acknowledgment of donations is essential for building strong donor relationships.
• Donor Communications: Regularly communicate with donors about your organization’s activities, accomplishments, and needs.

Program Evaluation

• Goals and Objectives: Clearly define the goals and objectives of your NPO’s programs.
• Data Collection: Collect data in your NPO’s bookkeeping to measure the impact of your programs on the community for better year-end accounting of your NPO.
• Analysis: Analyze the data to identify strengths, weaknesses, and areas for improvement.
• Reporting: Prepare reports that document the effectiveness of your programs and share them with stakeholders.

Form 990

While accounting and tax filing, non-profit organizations (NPOs) with gross receipts exceeding a certain threshold must file Form 990, a tax return that provides information about their finances, governance, and activities.

Ensure that Form 990 is completed accurately and on time to avoid penalties during closing final accounts for your non-profit organization. Consider consulting with a tax professional to help you navigate the complexities of Form 990.

Unrelated Business Income Tax

Unrelated business income is income generated from activities that are not substantially related to the NPO’s exempt purpose.

NPOs that generate unrelated business income may be subject to corporate income tax.

Exemptions: There are certain exemptions from unrelated business income tax, such as income from activities that are carried on for the convenience of members or employees.

Common Tasks for Both

Financial Statement Preparation

• Income Statement: This statement shows your organization’s revenue, expenses, and net income for a specific period.
• Balance Sheet: This statement shows your organization’s assets, liabilities, and equity at a specific point in time.
• Cash Flow Statement: This statement shows your organization’s inflows and outflows of cash during a specific period.

Tax Preparation

• Gather Necessary Forms: While accounting for non-profit organizations (NPOs) or small businesses, collect all relevant tax forms, including federal, state, and local tax returns.
• Calculate Tax Liability: Determine your organization’s tax liability based on its income, deductions, and credits.
• Tax Planning: Consider strategies for minimizing your tax burden, such as maximizing deductions and taking advantage of tax incentives.
• Professional Advice: Tax professionals are experts in tax laws and regulations. They can provide guidance on complex tax issues, ensuring that you comply with all applicable requirements. 

By consulting with an expert, you can confidently navigate the complexities of tax law and make informed decisions that benefit your organization’s financial health.

Employee-Related Matters

• Recordkeeping: Maintain accurate records in your NPO and small businesses’s bookkeeping of employee information, including wages, hours worked, and tax withholdings.
• Payroll Taxes: Calculate and remit payroll taxes, such as federal income tax, Social Security tax, and Medicare tax.
• Employee Benefits: Administer employee benefits, such as health insurance, retirement plans, and paid time off.
• Compliance: During accounting, ensure compliance with all applicable employment laws and regulations of your non-profit organizations (NPO) or small business for smooth preparation of final accounts for your non-profit organization or small business.

Insurance Review

• Adequate Coverage: Review your organization’s insurance policies to ensure that they provide adequate coverage for potential risks.
• Risk Assessment: Conduct a risk assessment to identify potential hazards and determine appropriate insurance coverage.
• Cost-Benefit Analysis: Evaluate the cost-benefit of different insurance options.
• Policy Updates: Update your insurance policies as needed to reflect changes in your organization’s operations or risk profile.

Conclusion

Year-end accounting and closure is a critical process for small businesses and non-profit organizations (NPOs). It’s a time to reflect on the past year’s performance, ensure financial accuracy, and prepare for the upcoming year.

By understanding the specific requirements and considerations for each entity, you can effectively navigate the year-end closure process.Check our step-by-step process for asset accounting to ensure accuracy.

By following these steps, you can lay a strong foundation for the upcoming year, improve your organization’s financial health, and position yourself for continued success.