Accounting for your rental business doesn’t have to be difficult. Although it may seem daunting, with the right tools and advice, you will be navigating tax season with ease. The foundation of good accounting starts with solid bookkeeping and organization and knowing when to get professional accounting advice. Below are some of the best accounting practices for landlords to follow.
General Best Practices
The best way to implement the tips below is to research and adopt property management software that fits with your business needs. This software is created specifically with landlords in mind and will help you automate a lot of the day-to-day responsibilities that may become tedious over time. Implementing property management software makes it much easier to keep organized books and track income and expenses, since the platform will automatically create a digital ledger of each transaction. Analyzing your accounts has never been easier than with the right property management software.
Also, it’s important that you separate your business and personal accounts. This is crucial because, when tax season rolls around, it’s much easier to file accurately and it ensures that you don’t confuse your personal assets with funds that belong to the business. Not only does doing so make your life easier, but it may also be required by your state law. Make sure you become familiar with the rules in your area before doing any accounting yourself.
Track Possible Deductible Expenses
It’s important that you keep track of all your expenses throughout the year instead of waiting until right before your tax deadline so that you don’t cause yourself and your tax professional unnecessary stress. The better prepared you are, the easier it becomes to track deductible expenses that will reduce your tax bill.
Possible deductible rental expenses could include real estate taxes, lease cancellation fees, mortgage interest payments, or maintenance payments to contractors. If you want to maximize your rental business’ income, it’s imperative that you research all possible deductions and use them to your advantage or hire a professional who can help you do so.
Decide Between Accrual or Cash Methods
There are two ways that you can conduct your accounting: the accrual or cash method.
The accrual method records income and expenses as they should occur, regardless of when the money actually enters or leaves your account. Most big businesses use this method to get an overview of income and expenses over a period of time. For example, if a tenant pays rent for both March and April up front, you would only record the March rent payment in March and the April payment for April, not both at once, even if those funds are in your account.
The cash method is better for smaller businesses that want to know exactly how much cash is in their accounts. Using the above example, if a tenant paid for March and April at one time, you would record both payments at the same time since the money was in your account then. However, if you maintain inventory, have gross receipts over $26M a year, or are a corporation, the IRS will not allow you to use the cash method.
Hire a CPA
Hiring a tax professional is a good idea for most businesses. Taxes can get complicated, and if you file them wrong, you can incur fines and penalties. Additionally, a CPA can advise you on the best ways to implement certain accounting systems that make analyzing your business’s financial reports much easier.
Rental property accounting doesn’t have to be overwhelming. With the proper bookkeeping and accounting tools, tax season will be a breeze. Managing your business’s money in an effective manner leads to fewer costly expenses, better rental income, and tax savings, so make sure your accounting business is in order with the tips above.