Episode Host: Henry Lopez is a serial entrepreneur, small business coach, and the host of The How of Business podcast show – dedicated to helping you start, run, grow and exit your small business.

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Episode Transcript

This transcript has been lightly edited for readability.

Announcer [0:00]: Welcome to The How of Business with your host Henry Lopez, the podcast that helps you start, run, and grow your small business. And now, here is your host.

Welcome Back, Jodi Arrant

Henry Lopez [0:12]: Welcome to this episode of The How of Business. This is Henry Lopez, and I want to welcome back my special guest and partner, Jodi Arrant. Welcome back.

Jodi Arrant [0:21]: Thank you for having me.

Henry Lopez [0:22]: We’re going to talk about bookkeeping, so don’t get scared of that. It’s going to be from a business perspective. What I want to focus on, since we’re approaching year-end really fast… Jodi and I were just talking about how quickly the weeks go by. We’re well into the fourth quarter, and the fourth quarter goes by fast because of the holidays. We’re trying to finish up the year, but from a bookkeeping and accounting perspective, we wanted to share some things, so I had Jodi come back on the show. She’s been on the show multiple times, and she’s also my partner for The How of Business Bookkeeping Service.

We’re going to walk through a list of, I think I have 11 items to think about, not in detail. I’m just going to touch on them at a high level. Jodi’s going to give us some thoughts and comments on what she has seen, and this list of items that I think you should go through is going to be on the show notes page for this episode. So, what are those things that you need to be thinking about? What are those things that you need to be having conversations with your CPA about as you approach the end of the year, so that you end up with clean books ready for taxes, but more importantly, so you have fewer surprises, and, as you’re working with your CPA and getting your books clean, perhaps even reducing your tax bill?

Again, you can find all of the resources, including the show notes page for this episode, where I will have this list. Think of it as a checklist of best practices for year-end bookkeeping. You can find all of that, and information about my one-on-one and group coaching programs, at my website, thehowofbusiness.com. I also encourage you to subscribe wherever you might be listening to this episode, so you don’t miss any future episodes. And if you’re listening on Spotify, I encourage you to answer the poll question for this episode.

So let me tell you briefly more about Jodi. Jodi has been a repeat guest on the show. Jodi Arrant is the founder of J. Arrant Consulting, a bookkeeping and consulting firm based in Eugene, Oregon. She has over 17 years of experience in bookkeeping and payroll. She’s a QuickBooks consultant and expert, and Jodi helps small businesses streamline their finances so you can focus on growing your business. Jodi, as I said, is my partner for The How of Business Bookkeeping Service. That’s a bookkeeping service that we launched earlier this year, and I’ll tell you more about that later. So, with all of that, Jodi Arrant, welcome back to the show.

Jodi Arrant [2:32]: Thanks again for having me.

Why Year-End Bookkeeping Matters

Henry Lopez [2:34]: All right, let’s go through it. We’re going to go through this list and touch on key points, and you’ll interrupt me and give me some thoughts on any of these based on your experiences and what you see. But let’s start with why this matters and why it’s so important. We go through the year, and some of us do a really good job of keeping up to date on bookkeeping. Some of you who are listening are doing the bookkeeping yourselves. Maybe some of you have it outsourced. But there’s stuff that needs to come together now, at the end of the year, that helps you take advantage of tax reduction opportunities, and also makes sure you clean things up now, instead of waiting until your CPA is desperately asking you for more clarification sometime in March or April as you’re trying to put together your returns. And even before that, Jodi, it could be as simple as making sure your 1099s are going to be correct, right?

Jodi Arrant [3:29]: Exactly. And I think when you’re trying to scramble at the last minute, that’s where you lose the accuracy in the books. There are discrepancies in your income and your expenses, so it’s really important to give yourself time so that you can make sure everything’s done correctly.

Henry Lopez [3:41]: Agreed. The end goal here is not just to feed the taxes, although of course that’s important, so that your CPA can put together your tax return and you take advantage of whatever tax advantages you can. But it’s also being able to use those accurate financials to help you make business decisions, and that’s what’s most important.

Jodi Arrant [4:00]: Yeah, absolutely.

Talk to Your CPA Before December 31

Henry Lopez [4:02]: All right. So the first one is talking to your CPA. You help a lot of your clients with this, I think. What are the things they should be talking about now, before the year is out? What should be on my list of things to chat with my CPA about? What comes to mind, Jodi?

Jodi Arrant [4:18]: Yeah, absolutely. Wrapping up loan information, like getting the year-end interest that needs to be split out. We need to look at expenses. We need to look at outstanding invoices and where we can clean things up. And even on the bookkeeper side, there are a lot of questions that might be outstanding that we need to finalize so that everything is accurate before we pass it on to the CPA.

Henry Lopez [4:40]: And there might be an opportunity, and you’ve got to get guidance from your CPA on this, to accelerate expenses or make an equipment purchase, if it makes sense. I’m not a big proponent of spending money just because of a tax advantage, but if you were going to spend that money anyway in Q1, it might make sense to accelerate it to Q4. Talk to your CPA about that, right?

Jodi Arrant [5:02]: Exactly. See what’s possible before the end of the year. You don’t want to wait till December 31 and then find out you missed the chance.

Henry Lopez [5:09]: Exactly. You may have year-end bonuses. You may be funding a 401(k) plan. All of those things ideally need to be done here in Q4, right?

Jodi Arrant [5:18]: Yep. Exactly.

Henry Lopez [5:20]: And if you have tax estimates or payments that have to be made, make sure you’re caught up on all of that. Those things are critical as well. You may not have mentioned depreciation, but a lot of times the way people handle depreciation is that your CPA will say, here’s the journal entry, here’s what you need to depreciate. That may not come until January, and it’s fine to get it in then, but ideally you get it ahead of time so it can get into the books as soon as possible. What do you typically see there? What’s the best practice for recording the depreciation entry?

Jodi Arrant [5:51]: I think it’s just having a good relationship with the CPA. As bookkeepers, we communicate directly with a lot of our clients’ CPAs, so we’re able to talk back and forth about what journal entries need to be done, and get that depreciation schedule and some of those things booked correctly on the balance sheet. So we have that open communication back and forth, or at least the client is communicating with both the CPA and the bookkeeper.

Henry Lopez [6:15]: Excellent. If you have a CPA who you don’t communicate with until sometime in January or February, when you say, “Here’s my box of receipts,” you’re really putting yourself at a disadvantage. So I really encourage you to either find a CPA or reach out to your CPA. This is the time of year to do so. The other thing I find is that people wait until that CPA firm is heads down doing tax returns, and of course at that point they don’t have the time to answer your questions. Now is the time, as we go into the fourth quarter.

Jodi Arrant [6:46]: Yeah, I don’t think it’s ever too early to start working on year-end, because the more ahead of the game you are, the better off you’re going to be in the end.

Preparing for 1099s and W-2s

Henry Lopez [6:54]: All right, I want to jump back to 1099s, because that’s something that’s really confusing to a lot of people. We can’t give you exact guidance on this, but the threshold has changed, right? Can you tell us a little bit about that?

Jodi Arrant [7:08]: Yeah, it used to be $600, and now it’s changed to $2,000 for 2026. So you have to go through and look at which contractors you’ve paid. It’s based on the business’s structure, or whether it’s an independent contractor. You have to send out W-9s, and that’s something you want to collect ahead of time, because you only have until January 31 to actually get these processed and submitted. They don’t give you very long to get this done. So you want to start collecting those W-9s early, so that on January 1 we can start getting them input and start generating those 1099s.

Henry Lopez [7:43]: January 31 comes fast. You have 1099s, and you may have W-2s that also have to be postmarked by January 31.

Jodi Arrant [7:52]: Yeah, exactly. If you’re using software for payroll, like QuickBooks or Gusto, they will usually do those W-2s. But if there are any corrections you have to make, those can sometimes take a month or two, and now your W-2s are going out late. So you want to review everything and make sure it looks good before that stuff gets filed.

Henry Lopez [8:11]: If you’re a small employer like me, for the last couple of years I’ve had one 1099 person. There are various online 1099 services that will do it for you as a one-off, so it’s not like you have to go spend money on QuickBooks Payroll. There are ways to do it. I do use QuickBooks for my finances, and what I have to do is make sure that the payments to that person are properly allocated. I’ve been working with her for some time, so I already have her W-9, and I have those payments showing up as 1099 payments. But there’s a process, and there’s a report, at least in QuickBooks and in other systems, to make sure of that. It’s nicer now with this higher threshold, because perhaps we don’t have as many.

Jodi Arrant [8:52]: Right.

Henry Lopez [8:52]: But did it get properly categorized? Trying to clean that up ahead of time is always an advantage.

Jodi Arrant [8:59]: It is. And if you’re going to use QuickBooks to file your 1099s, the person has to be properly classified as a contractor, and, like you mentioned, the payments have to be categorized correctly so they’re tracked properly. That’s something you want to keep on top of all year, rather than scrambling at the end of the year to make sure everything’s correctly categorized.

Cleaning Up Uncategorized Transactions

Henry Lopez [9:18]: Now, depending on how you’re doing your bookkeeping, whether you’re doing it yourself, you have somebody on your team, or you’re using a bookkeeping service like ours, hopefully you’ve been cleaning up those unresolved categorizations month to month. But that doesn’t always happen. I get it. So this is the time to clean up the stuff that says “Ask My Accountant,” or the stuff that’s in miscellaneous. This is the time to clean those things up, right?

Jodi Arrant [9:45]: Yeah, absolutely. Those can sit there for months at a time and be forgotten, and then all of a sudden you have thousands of transactions that you have to go back and try to remember what they were for. So it’s important to look at those every month. We try to send out reports monthly that say, hey, these are the transactions we don’t know about, and we need your guidance. If you can do that at month-end, or even quarterly, though monthly would be best, you’ll be way ahead of the game at the end of the year and won’t have to try to remember what happened back in January.

Henry Lopez [10:12]: Agreed. Listen, you’re not alone. A lot of business owners are behind on their bookkeeping or don’t do it at all. What I always encourage you to do is try to get ahead of that. Make this the year that you get ahead of it. Because if you tell me that things aren’t properly categorized, or you still have a bunch of things that aren’t in the right buckets, what that tells me is you’re not using your financials to help you make business decisions. Because how can you, if you can’t get an accurate picture of where the money is coming from and where it’s going, right?

Jodi Arrant [10:42]: Exactly.

Best Practices for Receipts

Henry Lopez [10:44]: So critical. This is the time to get that cleaned up. I didn’t have this on the list, and I’ve asked you this before, but as we’re talking about expenses, what is your recommended best practice for receipts? I’ve gone all digital. What’s the best practice you recommend now for keeping those receipts, and how long do we have to keep them?

Jodi Arrant [11:05]: I think digital is fine. Platforms like QuickBooks have an app you can get on your phone, so you can snap the photo, send it right in, and match it to the transaction. Then you don’t have to keep piles and piles of receipts lying around and worry about where they are and what they match to. So I think that’s a great practice. And the last I’ve heard, as far as audit trails, they can go back seven years. If you’re snapping a photo and matching it in QuickBooks, you’re going to have your records for as long as you’ve had QuickBooks, or whatever bookkeeping software you use. So I think that’s probably the best practice. Otherwise, you’re going to have boxes of receipts, and years later you’ll have to figure out whether you want to keep them.

Henry Lopez [11:44]: That’s what I do, and my understanding is also seven years. Of course, you’re going to confirm this with your CPA. I’ve gone all digital to get rid of the paper, and it’s actually easier to find things. I don’t sweat so much now about having a receipt for everything. For example, my QuickBooks subscription is an expense, and I know that if I need to, I can go into QuickBooks and download that invoice. I try to focus more on the meals and the smaller individual items where I may have to show proof that it was a legitimate business expense. I tend to concentrate there. What are your thoughts?

Jodi Arrant [12:17]: That’s a great thought. There’s also a feature within QuickBooks: if you get a lot of your receipts emailed to you, they set up an email address, and you can forward those emails to QuickBooks. So you can have all those digital receipts attached really easily without having to screenshot and upload a file. It makes it pretty simple.

Henry Lopez [12:36]: And if you’ve got a team of people, that’s one easy, great way to start automating that. Make it the rule that they have to email their receipts to that address, and then on a monthly basis, whoever’s doing your bookkeeping can confirm that you have those receipts electronically.

Jodi Arrant [12:51]: Exactly.

A Word About The How of Business Bookkeeping Service

Henry Lopez [12:52]: All right. I’ve mentioned it, but I want to share again The How of Business Bookkeeping Service that Jodi and I launched together earlier this year. It’s a great service, and I think we’re providing tremendous service. Jodi, with her team of bookkeepers, is my partner. Again, it’s called The How of Business Bookkeeping Service.

What we address is that typical problem: either you’re trying to do the books yourself right now, and it’s not something you like to do, or maybe you’re not very good at it, or maybe you’re using a bookkeeper, but they’re not doing what they’re supposed to be doing. I hear from a lot of my clients that their bookkeeper is behind several months, six months, seven months, and it’s not necessarily that they’re not doing it well. A lot of times bookkeeping services just get behind.

So what we offer is a bookkeeping service that gets your books reconciled monthly. Of course, we need some of your help to identify transactions we don’t know about, at least initially. But as long as we get that from you, and we have your bank accounts and credit card accounts connected, because we use QuickBooks Online, we’ll get your books reconciled on a monthly basis by the 10th or the 15th. So you’ll have accurate and up-to-date books that you can use, as I said, to help you make business decisions, not just to submit for your taxes.

The pricing for our base foundational service is $249 a month. We do have an onboarding fee, but we’re waiving that right now for listeners of The How of Business. If you want to learn more, just go to the show notes page or go to the website, and you’ll find a link for the bookkeeping service. There you can learn more about it, and if you’re interested, there’s a link on that page to schedule a consultation with me. I’ll try to understand where you’re at and what your needs are, and then I’ll let you know if it’s a fit or not. If it is, then we move forward with serving your bookkeeping needs. It’s Jodi’s team that has been providing that bookkeeping service. Anything you would want to add about the bookkeeping service we’re offering?

Jodi Arrant [14:49]: Just that we are U.S.-based, and that we work with small businesses to help them have clear and accurate financials.

Henry Lopez [14:57]: So if you’re interested, go to thehowofbusiness.com. Either go to the show notes page for this episode, or just look for the bookkeeping service link and read more about it there. And if you’re interested, schedule a free consultation.

Owner Pay and Commingling Funds

All right, let’s keep going. Owner pay and payroll: recording draws, distributions, all of those kinds of things. Let me ask it this way, Jodi. What are some common mistakes, or the kind of trouble people get themselves into, on this topic of owner compensation?

Jodi Arrant [15:24]: I think it’s actually tracking some of these draws and expenses, and the way owners pull the money. Sometimes a client will pay a personal credit card with their business account. It’s probably a better practice to actually pay yourself a draw and then pay the credit card. So there are some gray areas there, and it’s important to really know what the actual expense or the draw was for, so we can categorize it accurately, because that is important. It’s not going to look good in an audit if you’re paying personal expenses. But you definitely want to pay yourself an owner draw, and that’s totally acceptable. So you want to make sure those things are tracked properly, and that your bookkeeper especially knows about them as we’re working through your books.

Henry Lopez [16:06]: I think that’s a huge point. This touches on avoiding what’s called commingling of funds, and that can get you in real trouble. Not only can it get you in trouble with the IRS, but it can also expose you to liability. If you get a lawsuit, for example, it’s one of the things they can look at to say, well, this isn’t really a separate business, it’s all commingled. So it’s not only a tax issue or an IRS issue, it’s also a liability exposure issue.

I just had a conversation with my CPA about one of my businesses, on the whole question of whether I should just take all draws or whether I need to pay myself a W-2. The IRS has an interpretation on this that you must get your CPA to interpret for you. There’s a reasonable salary rule at a certain point. I’m not going to try to give you guidance on that. The point is that you’ve got to make sure you’re paying yourself the right way, meaning a combination, or just W-2, and there are a lot of parameters that come into that, which your CPA will help you with.

Assets and Depreciation

We touched a little bit on this already, but loans and assets. Let’s talk about assets, because you and I just recently had this conversation with one of our bookkeeping clients about categorizing an asset. The client I’m thinking of just launched recently. So what gets capitalized? What can be taken as an expense? Just at a high level, talk to me about that concept. Of course, you’ve got to talk to your CPA, but what do we have to consider there, especially if this was our first year of operation, let’s say?

Jodi Arrant [17:34]: Exactly. Definitely leverage the CPA to come in and give you those thresholds, because different CPAs have given different amounts. Sometimes one will say anything over $500, but I’ve had them say anything over $2,500, needs to be considered not just an expense but an asset. So it’s talking with your CPA, then looking through those amounts and seeing which purchases need to go where. Does it actually fall on the profit and loss, or does it need to go on the balance sheet?

Henry Lopez [18:03]: As business owners, we want to take that expense, right? But let’s say I’ve bought a $10,000 piece of equipment. The IRS says, “Whoa, whoa, whoa!” I can’t necessarily take that $10,000 as a write-off this year, right?

Jodi Arrant [18:16]: Right. That’s where depreciation starts coming into play.

Henry Lopez [18:20]: So, depending on the schedule that applies, and again, we’re not going to pretend to know here, you’ve got to talk to your CPA. Let’s say it’s five years of depreciation, whatever it might be. What your CPA does is calculate: okay, you can take this much in 2025, and then every subsequent year you can deduct X amount for the life of that asset, right?

Jodi Arrant [18:41]: Correct.

Henry Lopez [18:42]: And the IRS would not like it if you declared all of it in one year, because you’d be reducing your tax liability incorrectly. At the end of the day, what the IRS is looking for is that you’re paying your fair share of taxes.

Jodi Arrant [18:57]: Yeah, exactly.

Henry Lopez [18:58]: So two things can get us in trouble: underreporting income, of course, and overreporting expenses that are not legitimate business expenses, right?

Jodi Arrant [19:08]: Exactly. Yes.

Cleaning Up Receivables and Payables

Henry Lopez [19:09]: All right. Cleaning up receivables and payables. Tell me about that, especially as we get to year-end, where I may have delivered a service but haven’t been paid, and showing those kinds of things on the balance sheet. Talk to me about what I need to think about there.

Jodi Arrant [19:23]: Absolutely. Look at whether you have outstanding invoices that customers or clients haven’t paid. You need to go through and decide: am I actually going to collect these funds? Do I need to consider writing them off? Maybe you made an adjustment for a client and gave them a discount, but you didn’t update the invoice, so it still shows an outstanding amount due. Those are all things you need to go back and review on those invoices to see what you need to clean up. Even for clients that use estimates: have they actually converted the estimate to an invoice, or do we have both an estimate and an invoice in QuickBooks? So there are a lot of things to look at there that need to be cleaned up before the end of the year.

Giving Your CPA Access to Your Books

Henry Lopez [20:00]: One of the things you can do through QuickBooks Online and other platforms, and we do this for our clients, is give the CPA access to QuickBooks Online. Sometimes they want that so they can actually see the transactions, so that’s something they may ask for, and you can definitely do it.

Jodi Arrant [20:18]: Yep. It definitely gives a more detailed view than just sending a profit and loss and a balance sheet. Those are very basic, and the CPA doesn’t know if something looks like it’s in the wrong place.

Henry Lopez [20:29]: Especially if we’ve had some of these things where you’re asking them to interpret: Should this have been capitalized? Is it an expense? What do we need to do with the interest? And all of those kinds of things. Also, am I going to classify some of the money I put in as a loan to the business, or is it all a capital infusion? Those are the things they can look at in the transactions to better answer those questions, right?

Jodi Arrant [20:51]: Yep. Exactly.

Getting Your Bookkeeper What They Need

Henry Lopez [20:52]: All right. That’s, at a high level, what I wanted to cover. Again, the complete list of these 11 items that you should think about will be on the show notes page for this episode at thehowofbusiness.com. I encourage you to use it as a checklist. But was there anything else you had in your notes, Jodi, that I didn’t ask you about as it relates to year-end bookkeeping? Anything else you wanted to mention?

Jodi Arrant [21:15]: I think just touching back on getting your bookkeeper the items they’re missing. As a bookkeeper, I know this very well. This is super important so that we can finish up the books on our end: bank statements that are missing, loan documents, any receipts we need, or answers to outstanding questions about transactions. Those are some of the things that get left behind, and then we think, oh, the books are done, but actually we have things missing. We can reconcile the accounts, and we can send you a report every month, but there can still be items hanging out that we need to wrap up.

Henry Lopez [21:47]: That’s one of the things you do very well with your clients, and through The How of Business Bookkeeping Service: provide that report that says, here are the transactions that are outstanding, just sitting in this bucket waiting to be properly classified. So this is the time to address those and get them cleaned up.

Jodi Arrant [22:02]: Exactly.

What Makes a Great Bookkeeping Client

Henry Lopez [22:03]: Anything else? If somebody asked you, “What does your ideal client do?” what else comes to mind that makes it excellent for you to work with them and serve them as a bookkeeper?

Jodi Arrant [22:14]: I would say proactive communication. Let us know about new bank accounts, new loans, equipment purchases, or any changes in your business. That’s something we need to know, and we may not realize those things are happening behind the scenes. So it’s important for you to let us know, and then we can tell you what documentation or information we need.

Wrap-Up

Henry Lopez [22:33]: Excellent. Jodi, thanks again for taking the time to be with me today and sharing all these tips. I encourage everybody who’s listening to go to the show notes page for this episode and go through this checklist, either yourself or with your bookkeeper, so that you get all this done and finish the year strong when it comes to your bookkeeping and your financials. Jodi, thanks for coming back on the show.

Jodi Arrant [22:54]: Thank you. Thanks for having me again.

Henry Lopez [22:56]: This is Henry Lopez, and thanks for joining us on this episode of The How of Business. You can find the show notes page and all of the resources at thehowofbusiness.com. We release episodes every Monday morning. You can find the show anywhere you listen to podcasts, including The How of Business YouTube channel, and again at our website, thehowofbusiness.com. Thanks for listening.