MARINE CITY, MI, USA, August 15, 2023 – The terms bookkeeping, accounting, and audits may be scary words to you as a burgeoning landlord, but they don’t have to be. Take a few moments to explore the basic rental property accounting practices below and learn more about the benefits and steps to having a solid accounting process.
Basic Rules
Analyzing your rental business’ financial performance is a crucial way to improve your profitability. You can enhance your rental income, save on taxes, and suffer fewer expensive mistakes.
One basic and easy way to improve your accounting practices is to separate your business and personal accounts. Doing this will make tax season much easier for both you and any tax professional you’re working with by ensuring that your personal assets aren’t at risk if you undergo an audit. Also, you may be required to keep your business and personal accounts separate by your state’s laws, so be sure to check that you remain in good legal standing by checking your local guidelines.
Also, if you have a separate savings account specifically for your rental business, you can have peace of mind that future expensive situations like vacancies won’t run your profit into the ground. Also, it will make holding onto your tenant’s security deposits much easier and more organized.
Deductions and Tracking Income
Knowing which deductions you can take advantage of as a landlord is a key way to maximize your profit. Your tax bill at the end of the year will be minimized by exploring potential deductible rental expenses like supply and equipment costs, lease cancellation fees, insurance, and travel.
Tracking your income is also a foundational skill for landlords to master. You must become competent at bookkeeping to fully understand how your business is performing financially. You should keep up with bookkeeping tasks throughout the year to ensure that a) your data is accurate and b) to save yourself the stress of scrambling when tax season rolls around, trying to take stock of your income and expenses from the year prior.
Luckily, property management software is made specifically for landlords and some, like Innago, are free. Property management software includes many accounting bookkeeping capabilities that will make your life much easier, such as automatic recording of rental payments and expenses, saving yourself the extra step of creating your own records. Also, since it’s done by a computer, you don’t have to worry about silly mistakes that you may have made if you were to do it manually.
Accrual vs Cash Accounting
Deciding between the accrual or cash method of accounting is a choice you must make as a landlord, informed by the size and performance of your rental business.
If you’re a larger, corporate company, you’ll want to explore the accrual method. The accrual method is when you record a transaction as taking place when it is incurred, rather than when the funds actually leave or are deposited into your account. For example, if your tenant pays for two months’ rent up front, you would record one payment for each month, even though the money was deposited all at once.
Comparatively, if you’re using the cash method of accounting, you would record both transactions as having taken place on the day those funds were deposited. So, if both July and August’s rent payments were paid on July 1st, you would record it as such. The cash method is best for smaller businesses that prefer to know exactly how much money is in their accounts at one time. It’s important to note that you cannot use the cash method if you maintain inventory, are a corporation, or have gross receipts over $26 million a year.
Hire a CPA
Rental property accounting can be difficult even for seasoned landlords. Do yourself a favor and hire a professional to do the hard stuff for you. Even though you pay someone to do your taxes and identify important deductions, you still must maintain an organized system of bookkeeping so you can give your CPA the most up-to-date and accurate information, so heed the advice above and figure out what accounting methods work best for you and your business.
Accountants can help you file your taxes, ensure you remain legally within tax law, represent you in the case of an audit, and advise you on the long-term financial health of your rental business. The investment into hiring a CPA will more than pay off when thinking about the costliness of potential lawsuits, audits, or missed deductions.
Conclusion
Accounting doesn’t have to be scary. Start with basic, foundational bookkeeping practices and ensure that all your files and records remain organized. From there, either do the research and learn how to analyze the data yourself or hire a professional to help you out. Maintaining sound accounting practices is the only way to be fully clued in on the financial health of your business, so it’s best to take this responsibility seriously.
Contact:
Name: Arvind Upadhyay
Company: Innago
Email: support@innago.com
Website: https://innago.com/
Address: 311 S PARKER ST, MARINE CITY, MI 48039-3597, USA
