Year-End Close Checklist for Small Business Bookkeeping

What does closing the books at year end mean, and what do I gather first?

Closing the books is a final reconcile and review of the tax year's records, not a filing. The IRS requires books that show gross income, deductions and credits, in any system that clearly shows income and expenses. A close makes the books reliable enough for a preparer to build the return.

The books follow the tax year: the calendar year is the most common, so most small businesses close on December 31. A fiscal-year business closes at its own year-end (see calendar year or fiscal year). Keep the books on the same accounting method as the return (Publication 583); if they use another basis, keep a written reconciliation of the differences for the preparer (26 CFR 1.446-1; see accrual books and a cash-basis tax return).

A close is routine with one bank account, no payroll and no stock. These make it harder:

• A partnership or corporation. The return's balance sheet (Schedule L), when required, should agree with the books (Form 1065, Form 1120-S and Form 1120 instructions).
• Inventory. The year-end count sets cost of goods sold.
• Payroll or contractors. Their forms are due the month after year-end and must tie to the books.
• Many accounts, or books more than a month behind. The IRS says to reconcile the checking account each month; behind books turn a close into a catch-up.
• Uncategorized items, accounts that will not reconcile, or owner money mixed in. A checklist closes clean books. Books in this state need repair before a preparer can use them: see the bookkeeping cleanup checklist.

Gather these first:

• December statements for every bank, card, loan and payment-processor account
• Payroll reports and the year's wage totals
• Contractor payments, with a W-9 (taxpayer ID) for each payee
• Loan statements showing the December 31 balance and the year's interest
• Assets bought, sold or scrapped during the year
• Inventory count sheets, if you sell goods
• Forms 1099-K and 1099-NEC sent to you; a Form 1099-K may not equal your income
• Last year's return

What do I reconcile first on a year-end close checklist?

Reconcile every bank, card and loan account to its December 31 balance. Publication 583 says to reconcile the checking account each month; the test is that the adjusted statement balance (after deposits not yet shown and uncleared checks) equals the adjusted books balance (after bank charges and corrections).

1. Get the December statements. Closing before they arrive leaves December unmatched. If a card or loan cycle ends earlier, ask for the December 31 balance.
2. Start from last year's closing balance. An opening balance that is off comes first: see a beginning balance that is wrong.
3. Match deposits and payments. A statement differs from the books because of bank charges not yet entered, deposits made after the statement date, or checks that have not cleared. Enter the charges; list uncleared checks as outstanding.
4. Cards and loans. Reconcile each card to its statement; paying a card is a transfer, not a second expense (credit card payments). Match each loan to the lender's December 31 statement; interest is an expense and principal reduces the loan (recording a business loan).
5. Other accounts that hold business money, such as payment-processor balances and cash: see reconciling sales and payouts.

A bank feed imports transactions; it does not prove the books match the statement. See bank feeds are not reconciliation.

How do I treat sales, bills and payroll that straddle year end?

For the return, put each item in the year its tax accounting method requires (Publication 538), and flag any difference from your books for the preparer:

Supplies follow their own rule under either method: those you track or count are generally deducted when first used or consumed; those kept with no use records or counts, when paid (on accrual, when incurred). The small-purchases election below can change that (26 CFR 1.162-3; inventory or supplies for small sellers).

Keep the method last year's return used: changing one generally needs IRS approval, requested on Form 3115, which for an automatic change goes with the return for the year of the change (Form 3115 instructions). A business with inventory generally uses an accrual method for purchases and sales, with a small-business exception below. See cash or accrual for a small business.

Three items can straddle the year:

• An invoice sent in December and paid in January: see an invoice paid in the next tax year.
• Rent, insurance or other costs paid ahead: see prepaid expenses at year end.
• Payroll for December paid in January: Form W-2 amounts are based on wages paid during the calendar year, so wages for December work paid on January 1 go on the next year's W-2 (W-2 instructions). Whether the expense belongs to December depends on the accounting method and on who is paid: pay owed to a related person who uses the cash method is deductible only when paid (Publication 538). See accrued payroll at year end.

Which payroll and contractor forms depend on the books, and when are they due?

Employee and contractor forms are due in the first month after year-end, before the business return, so close payroll and contractor payments first.

A due date on a weekend or legal holiday moves to the next business day (IRS due dates); the dates above already allow for that. If you deposited all the taxes on time, you may file Form 941 or Form 940 by February 10, 2027 instead (Form 941 instructions). Employers who file 10 or more information returns (W-2s and 1099s combined) must file them electronically (IRS).

Payroll. Reconcile the payroll reports with the wage, withholding and employer-tax accounts, and explain timing differences, such as December wages paid in January, rather than forcing the totals to match. The IRS matches the four quarterly Forms 941 to the W-2 totals on Form W-3 (income tax withheld, Social Security wages and tips, Medicare wages and tips) and may contact you if they differ (Form 941 instructions). A balance that will not clear: see payroll liabilities that won't clear. Withheld tax that is not paid over can make a responsible person personally liable for a penalty equal to the tax, if the failure is willful (section 6672); the IRS generally has 3 years from April 15 after the payroll year, or from a later filing date, to assess it (IRM 5.7.3). See the trust fund recovery penalty.

Contractors. List each payee you paid the threshold or more during the year for services, including parts and materials, with a W-9 on file. Payments by credit card, debit card or a third-party payment network are reported by the payment company on Form 1099-K, so they come off the 1099-NEC list (1099 instructions). Who gets a form, including corporations and backup withholding: which contractors get a tax form. A payee who will not give a number: collecting tax IDs from contractors. A missed date: late contractor and employee tax forms.

What do I do about inventory, fixed assets and depreciation at year end?

Count the stock and list the assets, with dates and costs.

Inventory

A business that makes or buys goods to sell values its inventory at the start and end of each tax year to find cost of goods sold. The IRS requires a physical count at reasonable intervals, and the book amount must be adjusted to agree with it; year-end is the practical time. Cost of goods sold is opening inventory plus purchases and other costs, minus closing inventory.

• Opening inventory usually equals last year's closing inventory; a difference must be explained (Publication 334).
• Goods the owner takes for personal use come out of purchases and go to the owner's drawing account.
• Count sheets should show who counted and who priced the items, and the valuation method must stay consistent from year to year (Publication 334).

A business whose average annual gross receipts for the prior three years are at or under $32,000,000 (the inflation-adjusted limit; businesses treated as one employer count their receipts together, per Publication 538), and that is not a tax shelter, can choose not to keep an inventory but must still use a method that clearly shows income (Publication 538). Settle which applies before skipping a count. Unsellable stock: writing off dead stock.

Fixed assets and depreciation

Depreciation starts when property is placed in service: ready and available for its specific use, even if you have not used it. For a calendar-year business the cutoff is December 31. Equipment delivered in December that was not installed and working until January is a January asset.

List each asset with its description, cost, seller, placed-in-service date, business-use share, and any sale, scrapping or move to personal use. Publication 946 requires records of business, investment and personal use, and stops depreciation when property is sold, moved to personal use, abandoned, scrapped or destroyed. The preparer uses the list for depreciation, on Form 4562 where it is required (Form 4562 instructions).

• Small purchases: a business can elect, on a timely filed return, to expense items up to $2,500 per invoice or item (the limit without an applicable financial statement), if its books followed a consistent expensing policy that existed at the start of the year; inventory is excluded (IRS tangible property rules). See expense or capitalize small purchases.
• Missed depreciation: allowable depreciation not taken in a prior year cannot simply be taken this year; a correction may need an amended return or a change in accounting method. See rebuilding a missing depreciation schedule.

How do I clear uncategorized items and owner transactions?

Give every transaction a category and a document. The books must show gross income, deductions and credits (Publication 583), and an uncategorized item shows none. Proof of payment alone does not establish a deduction: keep the invoice or receipt too. The taxpayer carries the burden of proof. See uncategorized expenses before tax time.

Draws, distributions, capital put in and loan principal stay out of business income and expenses. Owner wages and guaranteed payments do not: each is its own item. Where they go depends on the business:

Personal spending paid from a business account is not a business expense: the personal part of an expense is generally not deductible. Record it as the table shows: recording owner's draws and guaranteed payments versus partner draws. See personal expenses paid from the business account, and for corporations S corporation paying personal expenses or a C corporation paying owner expenses.

Which reports and records does my preparer need?

Send the year's profit and loss, the December 31 balance sheet (the return's Schedule L, when there is one, should agree with it), the transaction detail, the reconciliations with the December statements, and the payroll, contractor, asset, inventory and owner schedules from the steps above. Add last year's return for opening inventory, the depreciation schedule and opening equity.

Which report feeds which line of the return is in books to the business tax return. Equity that does not match last year's return: retained earnings that do not match.

When is the business return due, and how much time do I have?

A partnership or S corporation return is due the 15th day of the third month after year-end; a sole proprietor's or C corporation's, the fourth. Payroll and contractor forms come first. For a calendar year:

An LLC that elected S or C corporation status follows that corporation's row; a single-member LLC owned by a partnership or corporation reports on its owner's return (IRS). A date on a weekend or legal holiday moves to the next business day. State returns, state payroll reports and sales tax returns have their own dates.

A partnership or S corporation has about two and a half months after December 31, and the payroll and contractor forms take the first month of it. A timely Form 7004 for a business return, or Form 4868 for Form 1040, extends the time to file, not the time to pay: see an extension when the books are not ready. Ask the preparer for the date they need the books; it is usually earlier than the due date.

Should I lock the year once the books are final?

Usually lock the year after the return is filed, not when you finish the books. A lock (closing date) is a setting in accounting software, not a tax rule. If it is set at December 31 before the preparer finishes, their adjusting entries, such as depreciation or an inventory correction, cannot be posted without unlocking it. After filing, a lock keeps the filed year from changing by accident. See closing date after taxes are filed.

What do I keep, and for how long?

Keep the records behind each item on a return until the period of limitations for that return runs out, and keep copies of the filed returns.

Some situations run longer, and records for a return never filed, or a fraudulent one, are kept indefinitely. Insurers and creditors may require records longer than the IRS does. Scans must meet IRS storage requirements before they replace paper: see scanned receipts instead of paper. The full list is in how long to keep business records; payroll records are in payroll records retention.

Example

These examples are illustrative; all amounts are in US dollars.

A self-employed designer with one account and one card

A designer with US$120,000 of revenue reconciles the business account and the card to December 31. One US$800 check has not cleared and stays on the outstanding list. US$6,000 moved to a personal account is recorded as draws, not expenses. Of three unincorporated freelancers paid for services during the year, the one paid US$3,500 by bank transfer needs a W-9 and a 1099-NEC, since the threshold is US$2,000; the one paid US$1,200 generally does not; the one paid US$2,500 by credit card is left off, because the card company reports card payments on Form 1099-K. The designer exports the profit and loss and balance sheet for the preparer.

An S corporation with two employees

An S corporation with US$600,000 of revenue and a single owner-shareholder finds that the payroll report shows US$150,000 of gross wages but the books show US$138,000, because the last two payrolls were never entered. It enters them before the W-2s go out, then checks the four Forms 941 against the W-2 totals. The owner's wages run through payroll. The US$30,000 the owner also took out is recorded as a distribution (or as a loan repayment, if that is what it was), not as wages or an expense. Whether the wages are high enough is a separate question: see S corporation owner salary.

An online store with stock on hand

An online store with US$250,000 of sales counts its stock on December 31 and finds US$40,000. The books carried US$46,000, so the book amount drops by US$6,000 and cost of goods sold rises by the same amount. Opening inventory is last year's closing, US$30,000. Purchases were US$120,000, with no other costs of goods, less US$2,000 of goods the owner took home. Cost of goods sold is US$30,000 plus US$118,000 minus US$40,000, which is US$108,000, leaving US$142,000 of gross profit.

Different for you?

• Your books hold uncategorized items, accounts that do not reconcile, or owner money mixed in: work through the bookkeeping cleanup checklist. If you cannot tell which items to finish and which to rebuild, or the return date is close, see bookkeeping help.
• Your books are months or a year behind, or will not be ready by the return date: see catching up on overdue books, an extension when the books are not ready and bookkeeping help.
• You are an S or C corporation, carry inventory or run payroll: the return's balance sheet should agree with the books, and the payroll dates come first. See books to the business tax return and bookkeeping help.
• A payroll or 1099 date has passed, or the return is late: see late contractor and employee tax forms and late filing and payment penalties. If the books behind those forms are also unfinished, see bookkeeping help.
• A non-US person owns your LLC or corporation: certain transactions between the company and its foreign owner are reported on Form 5472, so the books need to track them. See bookkeeping for a foreign-owned US company and bookkeeping help.
• The business changed how it is taxed during the year, or an owner joined or left: the effective date is a cutoff for the books. An S corporation whose election ends mid-year files for an S short year and a C short year (Form 1120-S instructions). A new S election (Form 2553) is due within 2 months and 15 days after the start of the year it covers, or any time the year before (Form 2553 instructions). See books after an S corporation election, recording a partner buyout and bookkeeping help.
• Your business uses a fiscal year, or your corporation is Canadian: see calendar year or fiscal year or the Canadian corporation year-end checklist.