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If a significant portion of your spending is categorized under "Miscellaneous," it suggests a lack of record-keeping. The IRS views this as a "catch-all" for personal expenses or undocumented cash withdrawals.

• The Fix: Create specific Chart of Account categories (e.g., "Field Supplies," "Small Tools," "Software Subscriptions").

The IRS expects businesses to eventually turn a profit. If you report a loss in 3 out of 5 years, they may reclassify your business as a "Hobby." If classified as a hobby, you can no longer deduct expenses against other income, which can lead to a massive tax bill.

• The Fix: Ensure your pricing reflects your "Labor Burden" and overhead.

It is statistically impossible for a legitimate business to have perfectly round expenses every month (e.g., exactly $500.00 for gas, $200.00 for meals, and $1,000.00 for supplies).

• The Fix: Use receipt-capture software to record the exact transaction amount, including cents.

The IRS uses automated programs to compare your reported income with your "lifestyle" indicators (mortgage interest, vehicle registrations, and real estate). If a business owner reports $20,000 in income but pays $40,000 in personal mortgage interest, it triggers an investigation into "unreported income."

• The Fix: Keep a strict "bright line" between personal and business bank accounts.

This is the #1 red flag for state and federal labor departments. If you provide the tools, set the hours, and supervise the method of work, that person is likely an employee, not a 1099 contractor.

• The Fix: Use the "Common Law Rules" (Behavioral, Financial, and Relationship) to determine status.

You can have a "profitable" business on paper but still run out of money because of high Accounts Receivable. If your customers aren't paying you fast enough to cover your bills, your business is at high risk of insolvency.

• The Fix: Monitor your "A/R Aging" report weekly and require deposits for large jobs.

If your QuickBooks balance doesn't match your actual Bank Statement balance, your financial data is unreliable. Unreconciled accounts often hide "duplicate" expenses or "missing" income, both of which will cause issues during a tax audit.

• The Fix: Perform a bank reconciliation at the end of every single month—no exceptions.