How to Eliminate the 3 Dreaded Year-End Surprises
For business owners and CEOs, year-end is defined by anxiety: Will we meet profitability goals? What is our final tax liability? The worst outcome is the Last-Minute Surprise—a hidden expense, a massive inventory write-off, or an unplanned accrual that completely upends your P&L in the final weeks.
This checklist moves beyond bookkeeping to establish the executive controls necessary to prevent these shocks, ensuring your 2026 budget starts from a rock-solid, defensible position.
The Three Dreaded Year-End Surprises (and How to Kill Them)
Every messy year-end close leads to one of these three profit-eroding shocks, all of which are fatal to audit defense:
The Tax Bomb: Caused by incomplete or inaccurate Cost of Goods Sold (COGS) documentation, resulting in a higher taxable income than expected under 280E.
The Inventory Collapse: Caused by neglecting obsolescence and unreconciled track-and-trace numbers, forcing a massive, unplanned write-down that severely impacts Gross Margin.
The Hidden Expense: Caused by failing to accrue liabilities, meaning costs incurred in 2025 unexpectedly hit your 2026 P&L, polluting the new year's budget and creating reporting fraud risk.
The following steps are your defense against these surprises.
1. Executive Control: The Full Reconciliation Mandate (Prevents Tax Bomb & Hidden Expense)
Year-end demands a detailed supporting schedule for every material balance sheet account. As a leader, your responsibility is to ensure these balances are verifiable—the ultimate proof of financial control.
A. Core Accounts for Monthly Reconciliation (The Consistency Check)
These accounts must be reconciled every month to ensure consistency, which is the cornerstone of audit defense:
Bank/Credit Card: Reconcile down to December 31st to ensure accurate cash balances.
Fixed Assets / Accumulated Depreciation: Reconcile the asset sub-ledger to ensure all major purchases are properly capitalized and depreciated, maximizing your COGS deduction where applicable.
Loans & Debt: Reconcile all balances to lender statements, confirming interest and principal payments are correctly classified.
Inter-Company Accounts: Ensure all related-party transactions net out or are perfectly documented. Auditors view sloppy inter-company balances as high-risk, uncollateralized loans.
B. The Year-End Supporting Schedule Mandate (The Audit Proof)
Every balance sheet account must have a formal supporting schedule detailing the final balance. This documentation is your defense against auditor scrutiny.
Prepaid Expenses: Provide a schedule listing the unamortized amount for every large prepaid item (insurance, rent, software). This proves your P&L recognized the correct amount of expense in the correct year.
Accrued Liabilities: Provide a schedule listing every accrued expense (e.g., estimated bonus payable, unbilled legal fees). This prevents Surprise #3 (The Hidden Expense) from bleeding into the next year.
Equity Accounts: Provide a clear schedule detailing all owner contributions/distributions and the final Net Income rolled into Retained Earnings.
2. Risk Mitigation: Deep Dive into Receivables and Payables (Prevents Hidden Expense)
Clean AR/AP management prevents you from overstating assets (AR) or understating liabilities (AP)—a primary focus of any auditor.
Accounts Receivable (AR) Review: Scrutinize your AR Aging Report. As CEO, you must decide which old invoices (90–120+ days) are truly uncollectible. Write them off using a formal Allowance for Doubtful Accounts to prevent artificially inflated asset balances and ensure accurate financial presentation.
Accounts Payable (AP) Accruals: This is your last chance to recognize all 2025 costs. Gather all unbilled vendor invoices and outstanding contract labor bills for December. Use an Accrual Entry to recognize these expenses in the current year, providing a true measure of 2025 profitability.
3. Inventory Cleanup and Obsolescence Review (Prevents Inventory Collapse & Tax Bomb)
Inventory is your largest asset and your biggest COGS lever. Errors here directly trigger Surprise #2 (The Inventory Collapse).
Compliance vs. Financial Count Reconciliation: Your state compliance system (Metrc, etc.) runs daily inventory reports for regulatory purposes. At year-end, you must formally reconcile the total quantity in your compliance system to the total quantity (units) in your financial system. Documenting the difference reveals operational and sales losses that must be accounted for.
The Final Physical Count and Shrinkage: The difference between the physical count and your General Ledger (GL) balance is shrinkage. Documenting this loss (which is highly scrutinized by the IRS) and applying the correct GL adjustment is vital for audit defense.
Work In Process (WIP) Valuation: (Applies only to Growers and Manufacturers, not Retail/Dispensaries). Ensure all accumulated costs (labor, materials, overhead) are accurately applied to WIP inventory as of December 31st.
Obsolescence (Write-Downs) and Waste Documentation: Inventory must be valued at the lower of cost or net realizable value (LCNRV). Write down unsaleable inventory to zero. Crucially, ensure every waste event is documented with disposal manifests and destruction witness sign-offs to justify the loss and prevent audit questioning.
4. Final Payroll & Tax Account Review (Prevents Tax Bomb & Hidden Expense)
These high-visibility accounts must be pristine, as they are often the first stop for auditors checking for compliance failure.
Wages Payable: Verify that the final December payroll accurately reflects all hours worked. Accrue any wages earned but not yet paid (if the pay date falls in January). Crucially, when these accrued wages and related payroll taxes are tied to Production/Cultivation labor, they maximize your deductible COGS, directly lowering your final taxable income (mitigating Surprise #1).
Sales & Excise Taxes: Reconcile all tax liability accounts (Sales Tax Payable, Excise Tax Payable) to the exact amount due in January. This prevents Surprise #1 (The Tax Bomb) by ensuring liabilities are correct.
Conclusion: Starting 2026 with a Clean Slate
A clean year-end close isn't just an accounting chore; it is an executive mandate. By eliminating financial surprises, protecting your COGS, and creating a bulletproof audit trail, you ensure that your 2026 budget starts from a rock-solid, verifiable baseline, free from the financial baggage of the previous year.