The case involved a couple where the non filing wife ran an interior decorating business. The income and expense information we were presented with showed “lots” of money flowing through the business.
Subtract the given business expenses and our figures said these folks should be paying several thousands of dollars a month.
Yet the oral narrative said they were driving old cars, the house needed maintenance, and they hoped for a total payment in the $500 range.
We got the bookkeeper prepared income and expense statements. My partner and I sat together huddled over tax returns and a calculator to try to find the disconnect. Something was missing. Why did the numbers show gobs of money, and the clients cry poor?
It wasn’t until I dragged both of them in to go over what we had that I learned something new: the sales taxes didn’t appear on an income and expense statement.
Bingo! Evidently, in bookkeeper-speak , taxes aren’t a business expense. They get paid, and these clients were paying them, but the standard accounting form didn’t show them. Subtract the sales tax, and the means test worked.
And as I talked to them, I learned the freight charges paid on the goods the decorator ordered weren’t on the expense statement either.
So, the narrow take-away is that some taxes don’t appear on Quickbooks income and expense statements.
The broader lesson though is the need to keep digging til you’re convinced you have the numbers right.
Sometimes what you see is the reverse of my problem: lifestyle that is inconsistent with the money flowing through the bank. You have to ask if the client is helping themselves to cash from the till or whether the business is paying some of the personal expenses.
I love business cases and business people. Add a facility with small business to your skill set and the world of clients who need you expands. But keep asking questions til you get the answers that make sense and fill the gaps.