Open a client's trial balance in February and you can usually predict, within a couple of minutes, what you are going to have to fix. Not because clients are careless. Because bookkeeping and tax accounting answer different questions, and the gap between the two shows up in the same handful of places every single year.
What follows is not a checklist. It is the adjustments themselves, worked the way they actually appear: a number that looks wrong, the document that explains it, the entry that fixes it, and what changes on the return once you post it.
Depreciation: the number that is never right
A dental practice's trial balance shows Depreciation Expense of $18,400. That is $1,533.33 a month, twelve times, because the bookkeeper set up a recurring entry three years ago and it has run untouched ever since.
Then you open the depreciation schedule. The practice bought a $52,000 CEREC milling unit in March and placed it in service the same month. With the Section 179 election the client wants, current-year tax depreciation is $61,300.
The bookkeeper is not wrong. Book depreciation is an accounting estimate meant to spread cost over useful life. Tax depreciation is a statutory calculation with elections attached. They agree only by coincidence.
The entry: debit Depreciation Expense $42,900, credit Accumulated Depreciation $42,900.
That single entry moves page 1 depreciation from $18,400 to $61,300, drops ordinary income by $42,900, and takes accumulated depreciation on Schedule L to its correct year-end figure.
There is a decision buried in this one that is worth making deliberately, once per client. If the client's financial statements have to stay on book basis (because a bank covenant depends on them, or the statements are reviewed), you leave the books alone and the difference becomes a Schedule M-1 item instead of a journal entry. For the majority of small business returns, where the trial balance effectively *is* the financial statement, you post the entry and move on. Either approach is defensible. Switching between them from year to year is not.
One more thing to check while you are here: the beginning balance. If last year's return ended with $58,000 of accumulated depreciation and this year's Schedule L beginning column shows zero, your balance sheet will not tie no matter how perfect the current-year entry is. That error passes e-file validation without complaint and surfaces years later.
The meals hiding inside travel
A specialty contractor's Travel expense is $31,200. Pull the transaction detail and you find 47 charges: twelve airfares, eighteen hotels, and seventeen restaurants totaling $8,940.
This happens because the client's chart of accounts has one bucket where the tax return needs two, or because the whole trip goes to Travel when the credit card statement is reconciled. It is not sloppiness so much as a chart of accounts that was never designed with Form 1120-S in mind.
Fixing it takes two distinct moves, and conflating them is where preparers go wrong.
First, the book reclassification: debit Meals $8,940, credit Travel $8,940. The books now describe what actually happened, and next year's comparison to this year means something.
Second, and this is not a journal entry, the 50% limitation. $4,470 of those meals is nondeductible. That is a permanent book-to-tax difference. It belongs on Schedule M-1, and on an 1120-S it also lands on Schedule K as a nondeductible expense, which reduces the accumulated adjustments account and every shareholder's stock basis.
If you "fix" the limitation by crediting Meals for $4,470, your books now show meals expense that nobody incurred, your financial statements are wrong, and the AAA and basis calculations that depend on that nondeductible number never happen. Keep the book number intact. Record the difference as a tax-only item.
Entertainment is a related trap in the same accounts. Client golf outings and ballgame tickets have been entirely nondeductible since the TCJA, not 50%, zero. If entertainment is sitting inside the same account as meals, it needs its own line before either number is right.
The loan payment that never touched the loan
A machine shop financed equipment in 2023 with a $185,000 note. This year's trial balance shows Equipment Note Payable at $185,000, the same figure as the opening balance, and Interest Expense of $50,400.
$50,400 is exactly $4,200 times twelve. The entire monthly payment has been coded to interest for the whole year.
The amortization schedule from the lender tells the truth: $38,760 of principal and $11,640 of interest.
The entry: debit Equipment Note Payable $38,760, credit Interest Expense $38,760.
The interest deduction falls from $50,400 to $11,640, ordinary income rises by $38,760, and the note drops to $146,240 on Schedule L, which is the number on the lender's year-end statement, and the number the client's banker will compare it against.
Two tells make this one easy to catch. A liability balance identical to last year's despite twelve months of payments is the obvious one. The subtler one is an interest expense figure that is a suspiciously round multiple of a monthly payment.
Personal expenses, and why the account you credit matters
A single-shareholder S corporation has $14,600 of Auto Expense that includes the shareholder's spouse's SUV, $3,200 of Office Supplies that turns out to be a home theater, and $7,800 of Travel for a family trip to Cabo that included exactly one client dinner.
Removing $25,600 of personal spending from deductions is the easy part. The account you credit is where it gets interesting.
For a sole proprietor it is Owner's Draw. For a partnership, partner distributions. For an S corporation it is Distributions, not "Owner Draw," and definitely not officer compensation.
That distinction has consequences beyond tidiness. In an S corporation, distributions reduce the accumulated adjustments account and each shareholder's stock basis, and they are supposed to be proportionate to ownership. Dumping $25,600 into Miscellaneous Expense does not just overstate deductions; it understates distributions on Schedule M-2 and on Schedule K-1, and the basis schedule that flows to the shareholder's personal return ends up wrong in a way that compounds every year it goes uncorrected.
The entry: debit Distributions $25,600, credit the various expense accounts it came out of.
Prepaid expenses, and the rule that often means no entry at all
The textbook version: a $12,000 general liability policy paid on November 1 covering twelve months. Ten of those months belong to next year, so debit Prepaid Insurance $10,000 and credit Insurance Expense $10,000.
The textbook version is frequently wrong for tax.
Under the 12-month rule in Reg. §1.263(a)-4(f), a taxpayer can deduct a prepaid amount in full if the benefit does not extend beyond the earlier of twelve months or the end of the following tax year. A twelve-month policy beginning November 1 runs out on October 31 of next year, inside twelve months. A cash-basis client deducts the entire $12,000 and no entry is required at all.
Where the rule does not save you: a 24-month policy, a three-year software license, prepaid rent running through the following December. Those genuinely require allocation.
And if the books are kept on accrual for financial reporting while the return uses the 12-month rule, the difference is an M-1 item rather than a journal entry, the same book-versus-tax decision as depreciation.
Accrued expenses, and the two dates that decide deductibility
An accrual-basis manufacturer closes December 31. The final payroll period runs December 22 through January 4 and pays out January 9. Of the $31,400 gross, $27,300 was earned in December.
That part is mechanical: debit Wages $27,300, credit Accrued Payroll $27,300.
The same client also accrues a $40,000 year-end bonus, and that is where accruals stop being mechanical.
If the bonus goes to a non-owner employee and is paid within two and a half months after year end, by March 15 for a calendar-year taxpayer, it is deductible in the accrual year. Still unpaid in April, it is not.
If the bonus goes to a shareholder-employee of the S corporation, Section 267(a)(2) applies and the deduction is deferred until the year the shareholder actually includes it in income. For an S corporation that rule reaches *any* shareholder, not just a majority owner. The accrual stays on the balance sheet as a liability and generates an M-1 addback.
An accrued bonus payable to an owner is one of the most reliably missed adjustments in small business returns, and it is expensive when an examiner finds it.
Inventory: the purchases problem
A retailer's trial balance shows Inventory at $102,300. It showed $102,300 last year, and the year before. Purchases for the year are $418,700, and everything bought was expensed as it was paid.
The January physical count comes in at $88,500.
Cost of goods sold is beginning inventory plus purchases minus ending inventory: $102,300 + $418,700 − $88,500 = $432,500.
The entry: debit Cost of Goods Sold $13,800, credit Inventory $13,800, bringing the balance sheet from $102,300 to the counted $88,500.
On the return this lands on Form 1125-A: beginning inventory on line 1, purchases on line 2, ending inventory on line 7. Schedule L line 3 has to equal Form 1125-A line 7. When they disagree the return is internally inconsistent in a way that e-file validation will not catch and a reviewer will.
An inventory balance that has not moved in several years is almost always a client who has never adjusted the book figure to a physical count.
Repairs versus capitalization: the $2,500 question in both directions
An HVAC contractor shows $61,300 in Repairs and Maintenance. Reading the detail, one line stands out: "Roof, Building A, $28,400."
A roof replacement is a betterment to the building's unit of property. It gets capitalized and depreciated over 39 years, not deducted.
The entry: debit Buildings $28,400, credit Repairs and Maintenance $28,400, and add the roof to the depreciation schedule, which changes the depreciation adjustment from earlier in this list.
The error runs the other direction just as often. Under the de minimis safe harbor, a taxpayer without an applicable financial statement who has a written capitalization policy in place at the start of the year can expense items costing up to $2,500 per invoice or per item; with an AFS the threshold is $5,000. A bookkeeper who dutifully capitalized fourteen $900 laptops has created fourteen entries on a depreciation schedule that should have been a single $12,600 deduction.
Ask whether the written policy exists. If it does not, that is a five-minute fix for next year that is worth real money to the client.
S corporation shareholder health insurance: the reclass that is not enough
An S corporation has $18,400 of health insurance premiums for its sole shareholder sitting in Employee Benefits.
A more-than-2% shareholder cannot receive health insurance as a tax-free fringe benefit. The premiums have to be included in the shareholder's W-2 Box 1 wages, deducted by the corporation as compensation, and then claimed by the shareholder as the self-employed health insurance deduction on the personal return.
The trial balance entry is simple enough: debit Officer Compensation $18,400, credit Employee Benefits $18,400.
But the entry alone does not solve it. If the premiums never made it into Box 1 of the W-2, the shareholder cannot take the above-the-line deduction and the corporation's deduction is exposed. Catch this in December and it is a note to the payroll provider before the final run. Catch it in September and it is a Form W-2c, an amended payroll return, and a conversation the client will not enjoy.
Of everything on this list, this is the adjustment most worth pulling forward into year-end planning instead of leaving for filing season.
State taxes, and the election that is easy to bury
Two things go wrong here.
The first is timing. A cash-basis taxpayer deducts state income tax in the year it is paid. The fourth-quarter estimate paid on January 15 belongs to the year of payment, not the year it relates to, and bookkeepers routinely record it the other way. State tax refunds of amounts deducted in a prior year run the same logic in reverse and are income.
The second is the pass-through entity tax election. Most states now let a partnership or S corporation elect to pay state income tax at the entity level, which sidesteps the individual SALT cap because the entity deducts it on the federal return. If your client made that election, the payment belongs in a state tax expense account and gets deducted on page 1. If the bookkeeper recorded it as a distribution, which is exactly what it looks like leaving the bank account, you have missed a legitimate federal deduction, sometimes a large one.
Knowing the adjustments actually landed
The entries are not the point. The return is. Three checks confirm the work:
The adjusted trial balance still foots, debits equal credits after every entry you posted. Net income per books after your book adjustments equals Schedule M-1, line 1. And after the book-to-tax differences and the separately stated Schedule K items come out, what is left equals ordinary business income on page 1, which equals Schedule K line 1, which equals Box 1 on every K-1.
When those three tie, your adjustments landed where you intended. When they do not, the size of the difference usually tells you which one did not.
Making the adjustments repeatable
If you are making the same adjustments for most clients every year, the value is in never losing track of which ones you have made and what they did to the return. Ledger IQ gives each one a home: adjusting and reclassification entries post against the trial balance with entry references, tax-only differences are recorded as tax journal entries with dedicated M-1 and M-2 offset rows so book and tax never contaminate each other, and a Working Trial Balance shows unadjusted, adjusted and tax-basis columns side by side with the income proof underneath. The workpaper is a byproduct of the work rather than a separate task, and the Return Tie-Out compares every mapped line against the return you actually filed.