Accrual-basis taxpayers have unique opportunities—and risks—at year-end. Below is a structured checklist covering income acceleration/deferral, expense strategies, inventory, payroll, asset purchases, and other key areas.
1. Income Review & Deferral/Acceleration
Income Recognition
- Confirm “all events test” for major revenue items.
- Verify revenue is not prematurely recognized (especially for partially completed services).
- Identify opportunities to defer income if economically justifiable (e.g., delay delivery of goods/services).
- If beneficial, accelerate income by completing work or billing before year-end.
- Review contracts for contingencies that may allow deferral.
2. Expense Accruals
General Accruals
- Confirm liabilities meet the all-events test and reasonable accuracy standard.
- Verify economic performance has occurred before accruing deductions.
Common Year-End Accruals
- Payroll incurred but unpaid at year-end.
- Accrued bonuses (payable within 2½ months).
- Accrued vacation and sick leave (if policy allows accrual).
- Accrued interest expense.
- State and local taxes incurred.
- Professional fees for work performed but not billed.
- Utilities and other period expenses incurred but unpaid.
- Review prepaid expenses and apply 12-month rule.
Related-Party Review
- Identify accrued expenses owed to related cash-basis taxpayers.
- Confirm these expenses will be deducted only when paid.
3. Inventory & COGS
- Conduct physical inventory count before year-end.
- Adjust for shrinkage, obsolescence, and damaged goods.
- Apply lower-of-cost-or-market or lower-of-cost-and-NRV where applicable.
- Review inventory capitalization rules (UNICAP).
- Consider LIFO/FIFO method review (including LIFO conformity and Form 970 if electing LIFO).
- Review accuracy of standard cost variances.
4. Fixed Assets & Depreciation
- Identify assets placed in service before year-end.
- Apply Section 179 expensing where beneficial and eligible.
- Apply bonus depreciation to qualified property.
- Review repair vs. capitalization policies (de minimis safe harbor, routine maintenance safe harbor).
- Ensure asset disposals and retirements are recorded.
5. Compensation & Benefits
- Accrue employee bonuses (confirm fixed liability and determinable amount).
- Review compensation to >50% owners and apply special rules.
- Accrue payroll taxes associated with year-end wages and bonuses.
- Review retirement plan options (SEP, SIMPLE, 401(k)).
- Confirm employer retirement contributions planned before the extended filing deadline.
6. Bad Debts
- Review A/R aging for uncollectible accounts.
- Write off specific accounts deemed worthless.
- Ensure bad debt reserve methods comply with tax rules (no allowance method for tax).
7. Prepaid Expenses
- Apply 12-month rule to prepaid items (insurance, leases, dues, subscriptions).
- Review long-term prepaid expenses for required amortization.
8. State & Local Tax Planning
- Accrue state income/franchise taxes based on current-year income.
- Consider timing of property tax payments (state limitations apply).
- Review apportionment factors for multistate taxpayers.
- Identify available credits (R&D, job creation, investment incentives).
9. Method of Accounting Opportunities
- Consider recurring item exception for eligible expenses.
- Review potential for accounting method changes (Form 3115).
- Evaluate small business taxpayer accounting methods (if < gross receipts threshold).
- Review long-term contract methods for construction clients (PCM vs. exempt methods).
10. Other Year-End Items
- Evaluate capitalization policies and refresh accounting procedures documentation.
- Review loan agreements for debt restructure tax impacts (COD rules).
- Confirm proper treatment of accrual vs. cash discounts.
- Review related-party transactions for transfer pricing or reasonableness.
- Check for net operating loss (NOL) utilization or carryforward strategy.
- Make year-end estimates for AMT exposure.
- Consider Section 199A (if applicable) and reasonable wage levels.
