As the owner of a new real estate business, you’re probably aware of the unique characteristics of your industry. But do you know how to answer this question:
“Why is accounting good for real estate?”
Here’s our answer: Setting up your real estate accounting system the right way enables you to minimize the labor and stress involved in large-value transactions, extreme income fluctuations, employee pay formulas, and government regulations.
These tips are for you if your business is:
- Real estate broker or agent
- Property management
- Building construction
- Residential sales
- Real estate investment management
Another reason to keep accurate financial records is that you will probably have to show them to interested parties at some point. These entities include:
- Government bodies (e.g. the IRS)
Learn the Regulations
Not only real estate transactions, but also the financial management of a real estate business, are overseen by local and state commissions. Familiarize yourself with their requirements before making any decisions about your bookkeeping system. If the language is unclear, consult a professional accountant who specializes in real estate.
Choose Who or What Will Do Your Real Estate Accounting
For real estate professionals, the most viable options are:
- Hire an accountant as a full-time employee
- Outsource accounting services
- Accounting software used by management or other designated employees
If you’re considering buying software for your small business, read this article first:
Select Your Accounting Method
You have two choices: cash basis or accrual. Once you make a choice, you must stick with it, unless you submit a change request to the IRS. (Your first tax return shows the IRS which one you chose in the beginning — you don’t have to submit any forms for that.)
Cash basis accounting is often preferred by small businesses because it’s easier and it tells you how much money you actually have in the bank on any given day. Accrual accounting is usually the choice of larger companies for its clearer view of financial performance and long-term planning.
Create a Chart of Accounts
This complete index of your company’s transactions is essential for knowing how you stand. It will save you many hours of work when you need to measure performance, generate a report, locate past transactions, or prepare tax returns.
The chart of accounts is organized into categories for easy sorting and retrieval. These categories can be anything you need. Under Assets, they might include Cash, Accounts Receivable, and Vehicles. Under Liabilities, you might have sub-accounts such as Accounts Payable, Loans, and Payroll.
Keep Business and Personal Transactions Separate
Don’t fall into the bad habit of pulling out your business credit card or checkbook to pay personal expenses — or vice versa. Without fail, it will cause more problems than it solves, including inaccurate books, tax mistakes, and cash flow crises.
Opening a separate bank account and a credit card that’s strictly for your business will also make you look more professional to your customers, creditors, and investors.
Fool-Proof Accounts Receivable
Collecting what they’re owed is one of the biggest headaches for small businesses. Prevent delayed and missed payments with an automated invoicing system that:
- Sends invoices promptly
- Includes all the necessary information
- Offers several convenient ways to pay
- Tracks and contacts delinquent payers
Reconcile Your Bank Account Every Month
This means checking that the transactions listed on the bank statement match what you have in your books. Identify any discrepancies and find out why they happened.
Usually, it’s something simple like a financial transaction that’s recorded in your books but the bank hasn’t processed it yet. Or it could be a more serious problem such as data entry error, misunderstandings of how to use the bookkeeping system, or even theft.
Figure Out Worker Pay and Taxes
Your business may pay one or more of these types of compensation:
- Salary employee
- Commission employee
- Salary plus commission employee
- Independent sub-contractor
Ideally, you’ll have payroll software that can calculate them all, as well as track them for income tax withholding. Fees to independent contractors may be handled separately by accounts payable since these workers are not by definition your employees.
You’ll also need to learn which tax forms to collect from employees (W-2) and contractors (1099), as well as how to report their income to the IRS.
For more information about employee tax forms, check out this article:
Take the Easy Way Out
If all this seems overwhelming, consider outsourcing to financial professionals. Xendoo specializes in small business accounting, and we’ll relieve you of all that work and worry with services that range from real-time bookkeeping to timely financial reports to preparing your tax return.
Want to pay less tax on your 2019 income? Now is the time to make your moves. In order to be counted, they must be completed by December 31, 2019.
1. Capital Expenditures
Invest in new equipment or make other improvements to your business. Any purchase made in 2019 can be claimed as a deduction on your next tax return.
2. Capital Losses
If you sell stock or another asset at a loss (meaning you sold it at a lower price than you paid for it), you can deduct the amount of the loss up to $3,000. That loss can be used to offset capital gains made on other stock, and reduce the capital gains tax. And if you lost more than $3,000, you can carry the unused balance over to subsequent tax year(s).
Take note, you can’t buy the same or similar asset right back after using it to claim a loss deduction. That’s called a “wash sale” and if you do it within 30 days, the IRS will disallow your deduction.
3. Expense Acceleration
Move some expected early 2020 expenses into 2019. For example, you could purchase 3 months of supplies rather than your usual 1 month. Or pay your January rent early. Just pay for them before December 31, and they’ll be claimable on your 2019 return (which you’ll file in 2020).
If you pay by credit card, as long as the charge appears on your December statement, it’s deductible — even though you don’t pay the bill until January.
4. Income Deferral
In most cases, your tax return reports income only for the year in which you actually received payment for your products or services. Send out December invoices late in the month, so you won’t collect the money for them until January. You won’t have to pay tax on income received from 2020 until 2021.
5. Asset Depreciation
You have two options for claiming depreciation on new and used business assets: taking the full amount in one year or depreciating them over time. If you need the biggest write-off right now, take the full depreciation. However, that may not be best for your business in the long run, so discuss it with your tax advisor.
6. IRA Contribution
This tip relates to your personal income (which may or may not be separate from the business income). The money you pay into a traditional individual retirement account (IRA) is tax-deductible in the year you make the contribution. (Actually, you have until April 15, 2020, to make your 2019 contribution.) Any interest or other earnings the IRA accumulates over its life are not taxed until you retire and begin withdrawing the money — which maximizes their earning power.
These rules don’t apply to a Roth IRA. Contributions are not deductible in the year they’re made but taxed as ordinary income. The bonus of a Roth IRA is that withdrawals from it after retirement are tax-free — ideal if you want more income in your golden years.
Some of these tricks only put off your tax liability to 2021 (on your 2020 return), they don’t actually remove it. Whether that’s a good idea depends on your cash flow needs right now, what you expect them to be next year, possible changes in tax rates and laws, and other factors. Xendoo tax consultants can help you understand your options and plan the maximum tax benefits for your business.
Imagine being able to erase what you thought was an unavoidable cost of living or doing business. That’s exactly what you can do if you reside or locate your business in one of the seven — soon to be eight — U.S. states that don’t have an income tax:
• South Dakota
• Tennessee will be completely tax-free by 2021
Two more states don’t tax income from wages or earnings. However, they do tax income from interest and dividends on investments:
• New Hampshire: When interest and dividend income for the tax year exceeds $2,400 ($4,800 for joint filers) plus additional exemptions for age, blindness, and disability.
• Tennessee: When interest and dividend income for the tax year exceeds $1,250 ($2,500 for joint filers). This tax will be phased out over the next three years.
What if you live in a tax-free state but earn income in a taxable state?
You will have to file a non-resident tax return in the taxable state.
What if you live in a taxable state but earn income in a tax-free state?
ALL your income — including what you earned in the other state — must be reported on your state tax return.
Of course, you must still file a federal income tax return, no matter what state you live in.
Can you register your business in a state other than your home state?
For both LLCs and corporations, the answer is yes, you can. It’s an excellent way of saving on business taxes and also taking advantage of other money-saving breaks for businesses.
However, it can have drawbacks, such as extra fees, increased paperwork, more logistics hassles, and possible denial of protection against legal and financial liabilities. What you save on income tax may be less than what you lose on these other expenses.
Before you make a decision on what’s best for your business, be sure to consult your Xendoo CPA team about the tax issues, as well as a lawyer about the relevant state government regulations.