One issue that comes up more than it should is whether loans are properly documented.  Oftentimes a business lends money to its owners, or borrows money from its owners, without any note or even a memo documenting the loan!  This is not good.  When the auditors show up, oftentimes a transaction that nobody thought was taxable suddenly can be viewed as a dividend, or as additional payroll. 

It is very important when lending money from a company, or to a company (or really, whenever lending money), to document the term of the loan, the interest rate, a payment schedule, remedies for non-payment, etc.  While a carefully drafted loan agreement is ideal, even a short note that A lent B $X amount of money for Y years at Z interest rate is better than nothing. 

Another thing to consider is state lending rules, sometimes a loan that nobody thinks is a problem runs afoul of some state lending rule, and may even require that the lender register with the state before they can issue the loan.

All in all, it pays to put a little extra care into documenting loans, especially for closely held businesses.  This means proper loan documentation, and it also means consistent treatment, both in internal company financials, and on tax returns.  Nothing is worse than saying to an auditor "well, it really is a loan, but we didn't document it" or "we didn't book it."  And nothing makes an audit go easier than being able to give the auditor proper loan documentation, and internal books and records that match up perfectly with what is on the tax return.

A final note?  Make sure to make regular payments on the loan if you can.  Often the best proof that a loan is indeed a loan is that it has been repaid.  And sometimes the IRS will point to the lack of any repayments as proof that a loan is actually a dividend, or extra (and unreported salary).  It pays to be careful. 

Whether it is Q4 or Q1 it is always a good time to reevaluate your accounting systems and practices. What are some possible resolutions for 2019?

1. Use an accounting system.  This may sound obvious but it is surprising how many multi-million dollar revenue companies keep their accounting records in random excel spreadsheets or in 19th century style handwritten ledgers.  This may be ok when operations are still small (no, it's actually never ok), but it can be shockingly dangerous when revenue increases and suddenly there are millions of dollars at stake.

"Where is the record of that sale?!!" You definitely do not want to be asking this when it is time to prepare financial statements or tax returns, and you certainly don't want the answer to be that you think the bookkeeper recorded it somewhere on paper or on some spreadsheet that nobody can find right now.

2. Don't repeat mistakes. This may sound obvious but it happens so often and to devastating effect.  If your company has been audited in the paset and adjustments were made in some area, for God's sake, don't repeat the error.  Make sure a system is in place to catch it the second time around (and the third, and the fourth, etc.).

Same goes for misstatements on financials that had to be corrected before.  No matter what, do not make the same mistake twice.

I have seen tax audits turn nasty (and even criminal) where a company has repeated mistakes it was caught making in the past.   One mistake may be excusable, but making the same mistake after promising never to do so again starts to look like intentional behavior.  Don't let extreme sloppiness result in fraud penalties, or worse.

One issue that comes up from time to time, especially in closely held corporations, is the problem that the company may use the accrual accounting method, while the people who own the company are on the cash basis.  This can lead to timing mismatches that are costly to the business and the owners, if people are not careful.

The issue can arise because in many closely held corporations, business owners often pay corporate expenses with their personal accounts, and vice-versa.  Got an invoice for supplies?  I will put it on my personal credit card, reasoning that this is the most convenient way to handle it right now.

Accounting is not always tidy and organized, and people often think "well, I'll reconcile everything later."  The problem is that some items cannot be so easily reconciled later. 

What if the business owner takes out cash to pay for a business expense which is assumed but not invoiced until a subsequent tax year.  Let's say it is a service which is used now but not paid for after the fact. What if, and I've actually seen this happen, the invoice is delayed and does not come until the next calendar year, even for several years? 

The owner may have a serious problem.  They received cash which is theoretically tied to a corporate expense in a prior year, and then several years later the expense is actually paid.   But the business owner is on the cash basis so they can't deduct the expense when it's incurred, only when it's paid.  They may have income in the year they took money out of the corporation, and they may have a tax liability they can't offset against this income in that year.

One solution is indeed to be careful that corporate expenses are paid through the corporation, and not by owners personally.  That would solve a lot of problems. 

Another solution which isn't as good is to treat the money to the owner as a loan, well-documented of course.  However, it's possible that the tax authorities might not agree that the loan is proper, and still consider the owner to have received income.  There are a number of possible problems with running corporate expenses through personal accounts, and they can't always be solved by clever accounting.  So the lesson is to avoid this trap whenever possible, and keep corporate and personal accounts segregated.