⚠️ First - welcome to the new layout of The Plug. I'm still bringing the core content but have added a section below for the latest tax and finance news & some ways I could use your help to grow the impact of this letter. As always, let me know what you think! ⚠️

Confidence is everything in business. As a business owner, your team is looking to you for leadership through good times and bad. 🔍 And while you can't always predict external impacts, there are some very simple steps you can take consistently to minimize the unknown.

And Step 1 is get good accounting. 🧮

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Storytime

10 years or so ago, I was a young audit partner. Work in the private company audit space is very tax-dependent. The majority of the work you'll get, especially as a new audit partner, will be from tax clients. 😔 And this case was no different.

The client had grown a good business and was averaging like $2.5 million a year in net income - which made him ripe for a roll-up. 🎢 So when he was approached by a national company doing what he did, they pitched him a huge multiple - 10X GAAP net income. That's $25 million for those bad at math-ing. 🤯

There was just one problem.

The purchase price was large enough that the buyer insisted on a full audit 💩 - something this company had never had reason to pursue before. And it showed.

So I got the bone thrown to me - and because there was big money on the line, the client wasn't concerned about the price. I think we quoted like $35,000 which was a lot for an audit back then.

When we sent our request list, the client's HR manager + office manager + assistant claims manager + now accountant (all rolled into one) 🎩 let us know she was not able to run Accounts Receivable or Accounts Payable reports. She was only able to run them as of that day - and she didn't run them on 12/31. This didn't help us now that it was mid-April. 🤦

But those AR and AP reports were what we needed to adjust the otherwise cash basis financials to GAAP.

In short, GAAP accrual financials report income (and expense) when the underlying service is performed and complete. 📆 Whereas cash financials report income when you receive the customer payment or make the vendor payment. 💰 So to get a good income number, we needed to:

1. Back out of current year income cash receipts that were invoiced in the prior year
2. Add back to current income cash receipts received in the months after our year end
3. Do the same for accounts payable and vendor payments

But without AR and AP reports, we were stuck going line-by-line through bank statements 🔬 and working with the jack-of-all master-of-none accountant to help us code them to the right year.

But we (or the client) got lucky. The net impact between the adjustments was minimal 🤏 - so the client's expectations of a $25 million payout was still solid. And it was looking like I was going to be a hero.

Until we ran our last test. ✋

Before issuance, we re-ran our listing of "subsequent payments" - which is a listing of all material payments made by the company after the balance sheet date. We did this to make sure we didn't miss any liabilities that belonged to the year under audit. And guess what we found.

A few weeks before issuing the report, the company had paid $400,000 of commissions to it's sales team related to the year under audit. This was almost 5-6 months after the end of the year and caught us by surprise. It was material to the audit, so I had no choice but to record the adjustment that brought GAAP net income from $2.5 million to $2.1 million. 📉

I still remember the call from the owner: "Roger, is there any way we can just not book this? I know what I'm asking you, but you must realize how much money this is to me. Can you talk to [the tax partner] and see if he can think of anything?"

Besides the blatant ethical issues, there was a working capital peg in the deal. 🔩 So I explained that even if I cooked the audit, they'd still see this come out of working capital and start asking questions. Then he'd still lose his $4 million (if not the whole deal) and I'd lose my license after they sue me.

He agreed and signed off on the audit with this adjustment included. A painful $4 million hit. 🤕

But the lesson was that he had no idea what his GAAP net income number really was to begin with. He actually became one of our best referral sources for audits - spreading the gospel of getting your financials ready years ahead of time to avoid this set-up, and how high-integrity of a firm we were. 🤷‍♂️

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The Takeaway

The average spend on accounting and finance services is something like 2-4% of revenue for small business. ➕➖✖️➗ That means you're needing to grind all the way to $5-10 million in top line before you're bringing someone on full-time in house for accounting.

But going from $0-$10 million is the riskiest time in your business' life - putting you at a critical disadvantage if you don't know the basics about your financials.

Getting on with a good bookkeeper, getting a consistent monthly reporting package, and understanding what your financials are telling you are all must-haves if you want to survive and sleep at night as a business owner. 📈

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The purpose of this newsletter, my podcast, and my work with small business is to solve this problem for them: to help them grow with confidence in three steps:

1. Get good accounting
2. Get good tax strategy
3. Get good cash projections

We'll talk about tax strategy basics next week.

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🫡

🔥 Latest News in Tax and Accounting 🔥

1. IRS to Layoff Staff, Delay "Severance" for Others - Estimates of layoffs coming soon are as high as 15,000 employees. This is a wild chunk of the nearly 90,000 current employees, and stands in contrast to the recent pivot to retain "workers critical to filing season" who previously accepted the severance package. The recent layoffs are expected to target new hires, junior hires, and other non-critical roles. Expect a slow-down across the board (notice replies, answering phones, refunds processed, not to mention paper filed returns) unless major technology reform is implemented (read: budget increased). Link​

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2. New Tax Brackets and Tax Items for 2025 - Remember the updated tax brackets in effect for 2025. These have been adjusted for inflation by 2.8% - clearly not pegged to realistic inflation indicators. Also worth noting is the standard deduction is up to $30,000 for married couples. And the annual gift tax exclusion amount is up $1,000 to $19,000. This means a married couple (mom & dad) can give their married child $76,000 in 2025 without worrying about gift tax. Link​

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3. DOGE is Coming for the IRS - The Department of Government Efficiency (DOGE) has requested access to the IRS data room. Fresh off some salacious stories about Social Security, USAID, and other large programs, DOGE has set it's eyes on taxpayer fraud. The expectation is high levels of fraud in low-income credits like Earned Income Credit - you know the credit the IRS mails you and says "are you sure you don't want to take this?" Link​

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4. BOI is Back in Play - This is the stupidest thing to constantly have to send updates on. But in short, the most recent court ruling has BOI back being enforced. The deadline for filing reports originally due last year is now March 21, 2025 - or 30 days ish by the time you read this. Will your CPA help you? More doubtful now than Q4 of last year. But there are some services online that will do it for cheap. Or you can do it yourself - it's not that hard to figure out. Below is a long thread I did on determining reporting. Link to BOI website.

Roger Ledbetter | RE & SMB CPA @rledbetterCPA Beneficial Ownership Information reporting - the new tax filing that can turn your $300 LLC into a $10,000 fine or jail. Which of your businesses or side hustles does it apply to and how do you stay legal? A plain-English 🧵 with links and pictures 3:8 PM • Dec 6, 2023 32 Retweets 288 Likes Read 17 replies

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