Case study: $100,000 came in, but only $20,000 of expenses can be proven

Based on a real situation. Details are anonymized and amounts changed.

An LLC, nine months, one business account. Let's open the bank statement.

What came in: $100,000

• $49,000 by Zelle from clients
• $37,000 card processing
• $14,000 cash deposited at the ATM

Where it went, per $100 received

• $44 credit card payments
• $22 transfers to the owner
• $11 payments to individuals with no description
• $1 personal spending
• $20 expenses that can be documented

About $2 left in the account

Why it looks like this

A credit card payment isn't an expense. The expense happens at the moment of purchase, and the bank statement doesn't show it.

• The expenses may be on the cards. You need the card statements.
• A transfer to the owner is personal money and won't become a deduction.
• A payment to an individual needs a contract or an invoice behind it.
• Only the documented expenses are accepted by the IRS.

Tax is calculated on what came in, minus the expenses you can prove.

How to keep books so this doesn't happen

• A separate account and card for the business only. No personal purchases on them.
• The owner takes money one way: salary or distributions. Every transfer is labeled, and it isn't an expense.
• Every payment has a document: receipt, invoice or contract. Photo the same day.
• Monthly reconciliation: bank and card statements match the books. Not once a year before filing.
• Deposit cash to the account in full and record where it came from.
• Set aside part of every payment for taxes right away.

The takeaway

Money you can't explain, the IRS will explain for you. And not in your favor.

A bank statement isn't bookkeeping. Deductions live in receipts and card statements, not in a list of transfers.