Preparing Taxes Last Year was a Nightmare!! – direct quote from a new investor.
You have two options as a real estate investor. Run your business like a business and do what businesses do or not. If you choose the or not option, then you are going to be the investor quoted above, and having a total nightmare of a time getting your taxes completed.
So what does a business do? They have a system to keeping track of their income and expenses. And they have a system to make sure they are paying taxes as they go.
So let’s start with paying taxes as you go.
This is going to depend on the type of business you have. If you are buying and selling in your own name or through an LLC that flows through to your own personal tax return, you are going to want to pay quarterly estimated taxes as you go. Or if you are operating as a corporation, you will want to use some sort of payroll system. Consult with your CPA to get your company payroll system set up. Then working with him, project next years income and determine the best way to pay taxes – with the quarterly estimates or with payroll.
Several Investors I know use a payroll service and when they sell a house and make a profit, they pay themselves through the payroll service which takes out the needed taxes. However, working with your CPA, you must might find a better way to pay less taxes.
Next, keep track of income and expenses as you go.
Go out and buy Quickbooks Pro. It is by far the easiest and best way I know of to keep track of everything. But remember, that just buying the software does not solve the problem. It must be installed and used, ideally on a weekly or a monthly basis depending on how much business you are conducting.
In our own business, we have one day a week where we pay all of our bills. All of our contractors and subs know that they we pay bills on Thursdays and that they DO NOT get paid unless we have a valid W-9 on file and an invoice to be paid. This is a standard discussion we have with every contractor .
“No ticky, no checky” as my husband likes to say. When we hire a new contractor, before they get paid they must submit to us their W-9 and an invoice to match up with it.
Writing checks is one of the hardest things to get used to when you run a business. If you have a checkbook that fits in your purse or your pocket that you use to hand write checks – take it to the nearest shredder and dispose of it properly. Go online to some place like VistaPrint and order checks that can be put in your printer so you can print checks. Then, anytime you need to write a check, you turn on your computer, you open up Quickbooks and you enter the check and THEN you print it. If you follow this practice, 1/2 of all your work in keeping track of expenses is already entered.
Note that when you enter a contractor to be paid for the very first time in Quickbooks that it is going to ask you to “set them up”, which will require you to enter their company name that they want paid under (or personal name), their address, their contact information and most importantly their Tax ID number. That’s why you need the W-9. And after setting them up – scan in your W-9 and put it in your accounting folder under W-9s as your accountant is going to want to see it at the end of the year when they issue 1099s.
Also, because you are only paying contractors from an invoice, you then have the paperwork back up you need to save, just in case of an audit. You will want to scan in those invoices and save them. My method is to have a folder called Checks Written and then I name it the date, the company / person it was written to and then the amount. So something like 2016.12.21 Bobs Plumbing 27.80.
Now just recently we have started a new way to pay the contractor – GOOGLE WALLET. To pay this way you need to set your company up with a Google Wallet Account. Then you go First Go to Quickbooks and enter the payment as listed above. But rather than printing the check, you then go to Google Wallet and issue the payment. Be sure to keep the invoice as listed above and also save a digital copy of the email Google Wallet sends you showing you sent the money.
Now besides writing checks you are also going to have credit cards and debit cards. These I save up and enter once a week if at all possible. You may have some quick snap app on your phone or you may work directly from paper receipts. Either way, again you go to Quickboos and enter the receipt into the credit card section. Then file them away in a folder called Credit Card 1 or Credit Card 2 and named similarly to checks.
For my own business we have a main folder on our computer called Accounting. Actually the folder is on our computer and in our Dropbox files so we can access it anywhere we have an internet connection. We have a grouping of folders that looks something like this:
Credit Card 1 Statements
Credit Card 1 Receipts
Credit Card 2 Statements
Credit Card 2 Receipts
W-9s On File
You are going to enter everything and provide your quickbooks files to your CPA at the end of the year. They don’t need the individual receipts and statements. However in case of an audit you will want to have digital copies and a paper trail of everything and if you have a good digital filing system you can easily go from an entry into Quickbooks directly to the digital copy.
We also track every house in our Quickbooks system and their are several ways to do so. We recommend getting with your CPA to find out your chart of accounts and how you will be tracking houses with your system and have them instruct you on how to enter the purchase of properties, the expenses related to the property and the income related to the property.
We further have a digital folder of all of our houses where we track our houses. In this folder we have sections, such as:
- Purchase where we track all the documents related to the purchase like the contract, the closing documents and settlement statement.
- Before Photos
- Renovation where we track our estimates, time lines, contractor agreements, major invoices and warranties
- Tenants where we would track tenant information if the property was rented out.
- Appliances if we hold this as a rental, we would need to keep track of records of appliances and HVAC warranties and maintenance
- Sale where we track all documents related to the sale of the property
If you take the time to create your own system to keep track of all money coming in and all money going out.
If you do it on a regular basis at least twice a month if not every week.
And you consult with your CPA on Quickbook entires you are unsure of how to enter.
You should be in good shape this time next year when it comes time to issue 1099’s and complete your taxes.