Welcome to the final chapter of our year end tax preparation series for property managers. Find our first two posts, 1099s: The what, when, & how, and How to prepare for tax season. Special thanks to Buildium’s own Accounting Manager, Melissa Clucas, for her help with this property management accounting series.
The end of the year is upon us! This time of year, I think of three things: What gifts will I get my wife and kid? Will my neighbor put up those tacky lights and lawn decorations again? And, how can I make the new year as stress-free as possible? I may never get the right gift for my wife, but, I know that by following year end accounting and tax preparation best practices, I can go into 2016 on the right foot.
The list below is intended for the property managers, but these items could apply to any business.
January is the start of tax season, and property managers have a month to get 1099-MISC forms out the door to landlords and independent contractors. Now’s the right time to get a current W-9 on file.
Oh, and remember, 1099-MISC forms don’t need to be sent to every vendor you’ve worked with. For example, corporations don’t need one. So you’ll need a W-9 from Hank the Handyman, but not Home Depot.
This one only applies if you’re keeping your books or your client’s books on an accrual basis. If you’re working on a cash basis, skip this section.
With cash basis accounting, you recognize income and expenses when money changes hands.
With accrual basis accounting, you recognize income and expenses in the period when the activity happened, regardless of when the money actually changes hands.
For example, let’s say the heat breaks on December 15 and you call in a contractor to fix it. The repair costs $500 and is completed that day, but the bill doesn’t show up until January.
With accrual basis accounting, because the work was done in December, its expense should show up on December’s income statement. This is especially important at the end of the year, because when you book the expense determines which tax year the deduction affects. Your year end income statement should reflect all business activity, even if cash hasn’t changed hands yet.
Your accountant can help you with the necessary journal entry for accrued expenses.
Write off bad debt
Bad debt is an amount owed by someone that’s unlikely to be paid. You may hear a lot about bad debt related to companies entering bankruptcy or going out of business, but in property management, it’s common to claim unpaid rents from a tenant who skipped town. Or, an outstanding assessment from an association owner who lost their unit to foreclosure.
Writing off bad debt is important because it cleans up the books for the new year, but the bookkeeping for bad debt can get complex, depending on the reporting requirements. For example, if your company has investors that forecast. But, if you’re managing the books for a landlord who only cares about getting the incoming rent check, then the necessary entries will be a lot simpler.
Consult with your accountant for details.
Depreciation is a bookkeeping concept that accounts for wear and tear on assets. The IRS has specific rules about whether an asset can be depreciated and how to do it. In property management, depreciation is most commonly used when tracking the value of fixed assets—like buildings and appliances. Landlords can claim depreciation as a deduction on their taxes.
You can depreciate assets on monthly, quarterly, or annually. At year end, your task is to get all of the necessary entries on the books.
Stay tuned for next week’s post about frequently asked tax questions from property managers!Read more on Accounting & Taxes
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