Vague expense labels like "miscellaneous" on your P&L can trigger IRS audits. If undefined expenses hit 25% or more of revenue, auditors may disallow them. Use specific categories instead, or label catch-alls "office expense" rather than "miscellaneous."
Today I wanted to provide you with a quick bookkeeping tip, especially if you aren't using a company like Insight Tax and you're doing it in-house, or you have another company doing it. There's a couple categories that I noticed on some of our clients as we do Lots of tax returns for Jim's and other clients, and we don't do the books for all those clients. And so I see some pretty weird categories on the profit and loss statement. And so I want you guys to think about this from the lens of an IRS auditor. So if the IRS ever decides to look at your financials and audit what you have going on, they're going to go through your profit and loss statement, or they're going to look at your tax return and what you labeled the expenses. And if they see something that says other business expenses, or even worse, miscellaneous, what they're— what they're gonna see, what they're thinking is, huh, they think this is a business expense but they can't actually tell me what category it belongs into? I don't think so. They're gonna look into it, and they're probably gonna try to find everything they can to disallow you to So in general, we don't like using categories like other business expense or miscellaneous. Office expense is a better catch-all category if you need to use one, but also better if you can call it a specific category. Now I'm not saying have 100 different categories, that's too much. Don't have 100 categories, but certainly don't use things like other business expenses or miscellaneous. Those are hard to describe or explain if you're being audited, especially if that specific expense line item is 25% or more of your revenue. If you spent— if you had $100,000 of revenue and $25,000 are listed under miscellaneous expense, The IRS is gonna have a field day with that. So just don't do it. So again, that's a quick bookkeeping tip. Profitability is a choice, and be financially resilient.
