Accounting policies and important notes for 2024 books for Finaloop tax customers

Written by Emily Burrows
February 6, 2025

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Learn important information about Finaloop's accounting policies and how they can impact your financials and taxable income.

Accounting Policies

1. Accounting Method

We used the accounting method you selected when setting up your account.

2. Inventory and cost of goods sold (COGS)

Your inventory and COGS are tracked based on your selection of one of these methods:

• Purchase-based Method ('Record-As-You-Buy')
  Inventory-related purchases appear as COGS in the P&L. During the year, Finaloop didn’t update your inventory balance on your balance sheet. Instead, at year-end, we adjust your balances to reflect the accurate amounts of COGS and inventory based on your input.

• Sales-based Method ('Record-As-You-Sell')
  Inventory-related purchases are categorized as inventory on the balance sheet. COGS in the P&L are the cost of products actually sold - based on customer input in our app (with corresponding inventory adjustments on the balance sheet).

• Unit-based Method (InventoryIQ)
  Inventory-related purchases are categorized as inventory on the balance sheet. COGS in the P&L are the cost of products actually sold - based on a FIFO mechanism, taking into account POs and warehouse transfers recorded in Finaloop (with corresponding inventory adjustments on the balance sheet).

💡 Note: COGS and ending inventory balances as of 12/31/2024 were confirmed with your input.

3. Banks and Credit cards

Banks

• Bank balances were reconciled daily using data from your connected accounts.
• Year-end balances (12/31/2024) were verified by you based on your bank statements.
• Any mismatches between the bank statements and Finaloop’s balances were reconciled to the balances reflected in the year-end statements on 12/31/2024.

Credit cards

• Credit card balances were reconciled daily using data from your connected accounts.
• Year-end balances were verified by you against the most recent credit card statement available (ending December or January).
• Any discrepancies between the statements and Finaloop’s balances were adjusted to match statement balances as of the date of the end of the respective card cycle.

4. Sales channels and payment processors

Finaloop integrates with the following sales channels and payment processors:

• Shopify
• Amazon North America
• Etsy
• Walmart (US)
• eBay (US)
• Paypal
• Amazon pay
• Shop pay
• Stripe
• Afterpay
• Klarna

Here’s how we record and reconcile transactions:

Use case # 1: Both sales channel & payment processor are integrated

• Examples: Shopify & Stripe, Shopify & PayPal, Shopify & Shop Pay, Shopify & Afterpay, Shopify & Amazon Pay, Shopify & Klarna, Amazon North America, eBay (US), Etsy, Walmart (US), PayPal invoices, Stripe invoices.
• All data is auto-reconciled, including sales, refunds & returns, discounts, shipping income, sales tax, payment processor fees, and undeposited funds (UDF).
• The data is recorded and reconciled based on data retrieved from each sales channel and payment processor, through an API, adjusted for UTC time zone (Universal Time Coordinated).
• Payouts and transfers between payment processors (including marketplaces’ payment processors) to or from your banks and credit cards are matched to the respective transactions in the customer’s banks and credit cards.

Use case # 2 - Sales channel is integrated, payment processor is not

• Examples: Shopify & Sezzle, Shopify & Affirm, Shopify & Braintree
• All order data, such as sales, other order-related data (refunds & returns, discounts, shipping income, etc.) and sales tax, are recorded and reconciled automatically based on data retrieved directly from each sales channel, through an API, adjusted for UTC time zone (Universal Time Coordinated).
• Payment processor fees are calculated based on the difference between (A) The net amount of sales, other order-related items, and sales tax, AND (B) payouts and transfers from/to payment processors in the customer’s banks and credit cards.

Use case # 3: Payment processor is integrated, sales channel is not

• Examples: WooCommerce & PayPal, Wix Stores & PayPal, BigCommerce & Stripe
• Sales, other order-related items (refunds & returns, discounts, shipping income, etc.), and sales tax are recorded on a net basis, based on data retrieved from the integrated payment processor.
• Payment processor fees and undeposited funds (UDF) are recorded and reconciled automatically based on data retrieved directly from the integrated payment processor, through an API, adjusted for UTC time zone (Universal Time Coordinated).
• In these cases, sales tax is recorded based on input from the customer, adjusting net sales in cases they included sales tax.
• Payouts and transfers between payment processors to or from the customer’s banks and credit cards are matched to the respective transactions in the customer’s banks and credit cards.

Use case # 4: Neither sale channel nor payment processor is integrated

• Sales and other order-related items (refunds & returns, discounts, shipping income, etc.), sales tax, and payment processor fees are recorded on a net basis based on payouts and transfers from/to sales channel/payment processors as appear in the customer’s banks and credit cards.
• In these cases, sales tax is recorded based on input from the customer, adjusting the net sales in cases they included sales tax.

Use case #5: Amazon North America

In October 2024, Amazon changed how they display and report deferred transactions subject to Amazon's Delivery date reserve policy, impacting when Amazon reports sales and fees in the Summary & Transaction reports in the Reports Repository section in Amazon Seller Central.

Finaloop syncs sales & fees based on Amazon Finances API, which is reconciled with the Summary & Transaction reports. That means that starting from November 2024, deferred transactions are recorded in Finaloop's P&L only on the release date.

To learn more about what this means for your numbers, check out this article.

5. Sales Tax

• For integrated sales channels (Shopify, Amazon North America, eBay (US), Walmart (US) and Etsy), any sales taxes, VAT, GST or other regulatory fees or taxes collected from customers, are recorded directly in the balance sheet and, not included as part of your income in the profit & loss statement.

• In other words, the "Sales" account in those sales channels is presented net of any taxes collected.

• In non-integrated branded sales channels (e.g., WooCommerce, BigCommerce, Wix Stores) or marketplaces that are not subject to a Marketplace Facilitator legislation, sales tax and other taxes collected from customers are recorded as part of the sales account in the profit & loss statement.

• The "Sales" account in those sales channels is presented as gross of sales taxes. Any sales tax remitted, if reported to Finaloop by the user, is presented in the "Sales tax collected - other" account.

• In non-integrated marketplaces subject to a Marketplace Facilitator legislation, sales tax and other taxes collected from customers are not recorded in the sales account in the profit & loss statement.

• Instead, the "Sales" account in those sales channels is presented net of any taxes collected.

6. Money in transit

The balance in your “Money in transit” account as of 12/31/2024 is comprised of transfers or payouts initiated in 2024 but that were only cleared after year-end, such as:

1. Transfers between two bank accounts or between a bank and a credit card, that was paid before year-end, but received only after year-end
2. Money transferred between a payment processor or marketplace and your business (bank or credit card) before year-end, but received only after year-end.
3. Failed transfers that were sent before the year-end, and credited back to the bank account, payment processor, or marketplace after year-end.

7. Loans, lines of credit, merchant cash advances (“Loans”) and interest

• Loan balances and interest are calculated based on loan terms or other documentation you provided, and on the loan’s deposits and repayments paid or received from banks and credit cards connected to Finaloop.
• If Loan terms were not provided to Finaloop, no interest was recorded.
• Accrued interest for Loans is booked against interest & financing expense in your P&L. Interest expenses on liabilities to related parties were booked whether they were paid or not.
• According to IRC Section 267, to the extent the related party which extended the funds does not file an accrual-based tax return, an adjustment to the interest expenses which haven’t been paid may be required in order to reflect the allowed deduction for tax purposes.

Related party balance

A related party balance is any balance between the business and any of the business owners or someone related to them.

For any related party balances over $10,000 to/from the company that a customer does not intend to settle within 3 months of creation - in order to comply with the relevant tax laws and IRS regulations, we recommend putting a formal loan agreement in place going forward and pay the interest in accordance with the terms of the loan. The specific legal terms should be discussed with a legal advisor. From a tax perspective, the loan should reflect market terms, and in many cases, the interest rate cannot be lower than the AFR (applicable federal rate) in effect at the time the loan is put into place (specific rates will vary depending on the term of the loan). In the absence of a loan agreement, any related party balances have been reclassified into a balance sheet account named either "Due to/from owner - non-interest balance" or "Related party balance - non-interest bearing" (either an asset or a liability).

8. Payroll

Timing of recognition

Cash basis: Payroll expenses and payroll tax were recognized on a cash basis, at the time of the payment.

Accrual basis: Payroll expenses and payroll tax were recorded based on the time the liability arises (when the work was performed).

For example, if a 2024 payroll was paid in 2025, a payroll payable (liability) was booked against salaries and wages (or officer's compensation), and a payroll tax payable (liability) was booked against employer taxes & employee taxes.

Payroll reconciliation

• Supported payroll software: Payroll expenses and payroll taxes were reconciled against the payroll software. Currently, this includes only Gusto, provided that you connected Gusto to Finaloop and didn't use Gusto to report historical or non-Gusto payroll.
• Other payroll software: For any other payroll software (including historical or non-Gusto payroll reported via Gusto), payroll expenses and payroll taxes are recorded based on the transactions paid from the customer’s connected banks & credit cards and the inputs (if any) the customer provided with respect to those transactions.

9. Off books transactions

• We account for all transactions in banks, credit cards, stores, and payment processors, and for other transactions that were directly reported to Finaloop.
• Unreported additional transactions (such as uncashed checks, investments that have yet to hit the bank and were not reported, etc.) are not reflected in the books.
• Customers were requested to report to Finaloop any financial transactions related to their business.

10. Federal & state taxes

Federal, state income taxes and franchise tax are recognized on a cash basis once they are paid (i.e., we do not accrue federal and state tax liabilities) unless the customer provided specific input that some type of income taxes paid with respect to a previous tax year.

11. Depreciation

• Depreciation for assets acquired while being a Finaloop customer is based on tax depreciation under the applicable tax laws.
• Depreciation of assets acquired and reported for tax purposes before becoming a Finaloop customer is in accordance with the treatment reported in previous tax years.

Additional notes for accrual basis books

Accounts Receivable (A/R)

A/R is tracked throughout the year based on invoices created by the customer in Finaloop, PayPal, Stripe, and Shopify offline orders.

Accounts Payable (A/P)

A/P is tracked throughout the year based on bills created by the customer in Finaloop, Bill.com, and Settle.

Additional Important Notes

Sales tax and VAT liabilities

Any sales tax and VAT balances that were collected and have not been paid on a timely basis need to be paid as soon as possible to the relevant state authorities. Sales tax and VAT that are collected but not remitted to relevant state authorities are considered a crime. Please consult a legal advisor regarding any long-term non-remitted Sales tax and VAT. If you believe that any sales tax and VAT liability recorded in the books does not reflect your actual sales tax or VAT due, please let us know and we will amend the books.

Gain or Loss from Securities

The "Gain or Loss from Securities" account in the Profit & Loss statement includes both:

1. Revaluation gains or losses (unrealized changes in market value)
2. Capital gains or losses from the actual sale of securities (if any).

For tax purposes, only realized capital gains or losses are reportable. Therefore, when preparing the tax return, an adjustment must be made to include only capital gain or loss for tax purposes.

Multiple Businesses and Accounting Methods

If you have another business that is connected to the business Finaloop has prepared the books for, please notify Finaloop in advance and indicate what is the accounting method of the other businesses. Based on the information you provide, we will consider the proper accounting method for reporting. Businesses are connected if, for instance:

• They engage in the same industry
• Are connected by means of frequent intercompany transactions, cash transfers, or
• Have mutual team members.

By following these policies, we’ve ensured your 2024 books are accurate, clear, and ready for tax season!