Beyond Deductions: A Comprehensive Tax-Time Review
Getting your tax return ready for your rental property business can be overwhelming and stressful. After all, investment properties have so many moving parts and competing priorities. Thinking about taxes is just one more item on your to-do list. And if handled incorrectly, your tax return could lead to audits, fines, and penalties. We can help you fight that tax-related anxiety, though. REI Hub’s comprehensive five-part review will help you get ready for tax time.
Get Your Books in Order
Correct, organized accounting records mean you’ll have accurate reports and financial statements. These help you make sound financial decisions. Reviewing your books and getting them in order before you meet with your tax adviser or work on your return is worth the time.
Check for Extra or Missing Transactions
Make two reviews of your transactions for the year. On the first pass, look in your business account for personal purchases. Make sure those are recorded properly. For the next pass, check your personal records for business transactions, such as business purchases made on your personal credit card. Record those transactions on your rental property’s books. Remember, keeping your personal and business purchases separate is the best practice.
Look at your Net Income by Period report (or year-to-date P&L by month). Do you notice any gaps or drops in your expense categories? You want to record this year’s expenditures on this year’s books, so investigate whether you’re missing any invoices or statements.
These two steps ensure you aren’t overreporting or missing any deductible expenses.
Balance and Reconcile Your Books
The double-entry accounting system that REI Hub uses makes sure your books balance because each entry requires a debit and credit. However, if you use a single-entry accounting method, it’s easier to introduce or carry forward an error in your books. So, double-checking your figures and making sure your accounts balance are especially important.
Reconciling your accounts means you compare the transactions from your books to the transactions listed on a statement. This is a great tactic to catch transposed digits, overlooked interest or fees, and unrecorded transactions. Reconciling your accounts now saves your tax preparer time later.
Double-Check Your Potential Deductions
Your deductions decrease your tax liability. REI Hub’s Tax Time Double-Check is a good starting point for reviewing your deductions, but go even further by checking for these situations as well:
• Do you have a home office?
Rental property owners may qualify for a home office deduction. Check with your tax adviser to see if you qualify and which calculation method is best for you.
• Did you make improvements to your rental unit this year?
Improvements or fixed assets add value or extend the useful life of your rental property. You’ll recoup these expenditures through depreciation instead of deducting the cost all in one year as an expense. Remember to flag any fixed asset costs so you or your tax preparer can update your depreciation schedules.
• Did you pay professional, legal, or service fees this year?
If you hired an accountant to help you with your bookkeeping or taxes, or you hired a lawyer to draft your rental contracts, those expenses are deductible. And if you used a short-term rental platform like Airbnb, make sure you deduct the service fees. Guest service fees on Vrbo, Booking.com, and similar platforms are deductible as well.
• Did you rent part or all of your house this year?
Temporary rental, meaning fourteen days or fewer, of your personal home may lead to tax-free income. If you used your home for a short-term rental this year, ask your tax preparer if you qualify for the Masters or Augusta rule.
Confirm Your Reportable Income
Start by running a report, such as REI Hub’s Net Income by Period, that shows your income for the year. Are any of your rent payments missing? Track down missing or late rent payments and ensure they’re deposited and recorded in the correct account.
Reportable income includes more than just rent, though. Advance rent payments, like the rent for the last month of a lease, are also reportable for the year you receive it. You must also report constructively received income when it’s received. That means if your tenant leaves a rent check in your mailbox, you should report that income this year, even if the check is for next year’s rent. This also applies to rent checks you haven’t deposited in your bank account yet. Holding checks or postponing taking possession of payments doesn’t shift your tax liability to the following year.
Funds for lease cancellations, late payments, or forfeited security deposits also count toward this year’s income. However, security deposits that will be returned to renters won’t count toward your income totals for this year.
Failure to report income accurately can lead to fines and penalties from the IRS.
Schedule a Preseason Meeting
Tax season is a high-demand time for bookkeepers, accountants, and tax preparers. Scheduling a meeting with your tax adviser in the third or fourth quarter allows you to tackle several issues at once:
• Ask about any strategies or final adjustments you should make to reduce your tax liability.
• Confirm which documents you need to provide and which taxes you’re required to file.
• Decide who will enter depreciation or adjusting journal entries for this year.
• Discuss any transactions you need help recording.
• Review any updates to tax laws that may affect your business.
• Verify who will issue 1099 forms, if required.
Organize Your Documents
The IRS expects you to have support for the figures reported on your tax return. Your support documentation should confirm your income, expenditures, assets, and taxes. How you organize and store records is up to you, but it’s worth gathering your documents and creating a consistent storage method.
Storing all your receipts and records for the year in a shoebox may be easy, but it’s not helpful when you need to find a particular document. Consider storing physical documents chronologically or by type. If you’re short on storage space, clean out old records or go digital. Either attach digital copies as attachments in REI Hub’s Documents & Notes feature or keep your supporting documents on another cloud-based platform, like Dropbox.
Make sure your tax return for the prior year is easily accessible too. You’ll need it to prepare your taxes for this year.
Check Your Savings Account
Scrambling to find funds at the last minute to pay your taxes is stressful. Avoid that strain by evaluating your savings account well before your payment is due. If you’re not yet sure how much you’ll owe, setting aside 30% of your income should cover what your small business owes for both federal and state taxes.
And once you’ve calculated your tax liability for the year, remember to deduct the estimated tax payments you’ve submitted. The remaining balance is what you need to set aside. Keep the money reserved for your tax payment in a designated account so you don’t use it for other expenditures.
Confirm Your Schedule
Look at your calendar. Think about your remaining tax prep work, then ask yourself if you can reasonably expect to complete it in time. Your books may need lots of catch-up work. You might travel during tax season. Or perhaps your tax preparer can’t get your return finished in time. If the filing deadline seems unattainable for any reason, file for an extension.
Remember, though, even if you file an extension, the IRS requires you to pay any owed taxes by the original deadline. You’ll have to estimate your tax liability and use that amount as the basis for your payment.
While you’re looking at your calendar, mark the dates your estimated taxes and 1099 forms are due as well.
Takeaways
Proper planning and organization can help you avoid stress and anxiety—plus potential fines—during tax time. REI Hub’s five-part tax review goes beyond deductions to ensure that your rental property business is covered this tax season. Start using our comprehensive evaluation today so you can confidently prepare your tax return.
