Clean Up Your Balance Sheet

As the end of the year approaches, now is a great time to better your balance sheet. This can help you when it comes to obtaining financing for your business.  It can also reduce your taxes.

Here are three actions to consider:

1. Pay outstanding bills
If you are on the cash basis of accounting, deal with your accounts payable now. This will make your balance sheet look better and, in most cases, increase your business deductions (i.e., lower your taxes).

2. Handle receivables

If you’re owed money, whether you try to collect now or wait until the new year depends on your tax picture for 2011 and what you expect for 2012.

  • If you are on the cash method of accounting and believe that 2012 will be a much better tax year, try to collect what you’re owed before the end of the year. This will add to your revenue for 2011, which will be taxed at a lower rate than in 2012 (when you expect greater profits).
  • If you want to defer income to 2012, do not send out invoices just yet for work completed near the end of the year; wait until the last minute to do so in order to receive payment in next year.

In any event, if you have aging receivables, stay on top of collections. The longer you wait to collect, the less likely it will be that you’ll receive all or even some of what you’re owed.

3. Check your basis

As an S corporation shareholder, losses that pass through from the corporation are deductible by you only to the extent of your basis in stock and loans to the corporation. If you are anticipating losses for the year, make sure you have sufficient basis to claim losses on your 2011 return. You may need to lend money to the corporation to increase your basis.

Alternatively, you can make a contribution to capital (with no expectation of repayment). This will increase the shareholder equity on the balance sheet.

Final word

Talk with your financial advisor before the end of the year to determine what other actions to take in order to improve your balance sheet for the year.

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