Yearly Bookkeeping Surprises: The Good, The Bad, and the “Did I Really Do That?”

As we dive into mid-2024, it’s time to start preparing for year-end and tax season. From experience, I can tell you that staying organized, keeping your books updated, and ensuring expenses are correctly categorized will save you both time and money—potentially even keeping you off of the CPA butcher block.

This time of year often brings chaos: your desk is buried under piles of paperwork, you may start questioning whether Starbucks is watering down its caffeine, and you’re feeling overwhelmed. Don’t worry; you’re not alone. Many business owners feeling the same.

Let’s tackle the elephant in the room: Yearly Bookkeeping Surprises!  You know what I mean—the hundreds of dollars in client gifts, those “Ask My Accountant” transactions that never got classified, and miscellaneous entries throughout your financials. Just because you’ve categorized these transactions doesn’t mean they’ll fix themselves. At some point, you’ll need to explain these entries—ideally to your CPA rather than an auditor. Now is the time to review your financials and address these surprises or hire a bookkeeping firm to help. Think of it as a treasure hunt: every incorrect transaction you find means more money stays in your pocket.

Surprise #1: Misclassified Expenses

Meeting with clients over coffee or meals can be beneficial, but remember, these meals are now only 50% deductible, not the 100% they were in 2021 and 2022.

You might wonder if you can slip these meals under a 100% deductible category like Employee Celebrations. This is a no-no and can lead to trouble for falsifying financials. Similarly, you can’t categorize these expenses under Office Supplies.

Client Gifts are another tricky area. Gifts given to clients are not fully deductible. The IRS allows only $25.00 per person as a deductible expense; anything beyond that is non-deductible and the company eats the cost.

However, if the client gifts contain your company logo, then you would classify it as Advertising and Promotion and it then becomes a 100% deductible expense.  It must have your company name or logo to qualify as a legit Advertising and Promotion expense.

Carefully review your expense categories and reclassify any incorrectly categorized expenses. It’s also a good practice to mark and keep receipts for client meetings with details ie:  (who, what and where). Store these receipts securely—you never know when you’ll need to prove their validity.

Surprise #2: Missing Receipts

In today’s digital age, you might question the necessity of keeping physical receipts. The short answer: yes and no, it is a very grey line.  With accounting software such as QuickBooks, the expense is entered and noted with details. QuickBooks is excellent for tracking expenses, but it can’t replace the physical evidence of receipts. If you haven’t been saving them, review your bank and credit card statements. Highlight legitimate charges and file them with your receipts. Alternatively, you can scan receipts and store them digitally. This eliminates physical storage but requires diligence to ensure receipts are scanned and saved promptly. QuickBooks’ mobile app can simplify this by allowing you to take pictures of receipts and link them to transactions.

According to IRS guidelines, you should keep receipts for at least three years from the date your taxes are filed. If you underreport income by more than 25% or claim a loss from the sale of property, the IRS may extend this period to six years. We recommend storing physical receipts in a labeled bag, like “2024 Receipts,” and keeping it in a secure place. This ensures you’re prepared if you face an audit. Receipts are tangible proof that an expense is legitimate. Without them, you might have to scramble for evidence.

Audits: No one eagerly anticipates an IRS audit. You won’t find crowds of business owners excitedly waiting for their turn screaming out “pick me, pick me!”  However, if you draw the short straw and get the opportunity to have your very own IRS audit, you can do the happy dance because you will have receipts to backup your claimed expenses.  It’s all in the Proof!

Surprise #3: Underreported Income

Finding an unrecorded deposit in QuickBooks is a surprise in itself. You might wonder how it was missed and whether other deposits were overlooked. Such mistakes can lead to underreported income and underpaid taxes. The IRS is unlikely to overlook this—they might audit you and impose legal consequences. This can also trigger future audit scrutiny (RED FLAGS). By the end of your first audit, you’ll be well-acquainted with your auditor, though you likely won’t want to schedule regular meet-ups.

Surprise #4: Unexplained Expenses

Ever come across an expense so baffling that you question your state of mind when you classified it? For instance, why did you subscribe to “Potato Review, or that Emu Today and Tomorrow, magazine?”  Was it a prank, a scam, or simply an error? Regardless, it’s an unexpected expense that needs to be addressed.

Double-check your expense records against your statements to verify the legitimacy of the charge. If it’s a recurring expense you forgot to cancel, follow up to see if you can get a credit back and ensure it’s canceled going forward. If fraudulent, you should file a report with your credit card company to see if you can get the charge reversed.

Surprise #5:  Personal Expenses

Reviewing your financials helps ensure that personal expenses are correctly coded as owner’s expenses. Personal expenses cannot be treated as a business expense. Doing so can lead to falsified records and make you a target for an audit. Remove personal expenses from your financials and classify them correctly. Make every effort to keep personal and business expenses separate.

Surprise #6: Missing Tax Deductions

Discovering missed tax deductions can be a pleasant surprise as they help improve your bottom line. Don’t forget to gather any out-of-pocket expenses and enter them into your accounting system. Remember to keep the receipts. Finding a missed tax deduction could save you a significant amount of money.

Why You Might Need a Pro

As I mentioned, reviewing your financials is crucial but not painless. It’s time-consuming, and transactions can become tangled. This is where professional help becomes invaluable. Hiring a bookkeeping firm like LEOZIE Bookkeeping LLC can handle the complexities of what can and cannot be claimed. We consider ourselves the superheroes of the bookkeeping world. We help you navigate surprise expenses, misclassified transactions, and elusive receipts, so you can focus on running your business.

Here’s to making your surprises forever in your favor!