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"Some small business owners pay more for the accounting and bookkeeping that they think is necessary for income tax purposes, than they actually pay in taxes"
Business Bookmarks  The better your records, the more you can write off on your taxes. Then, when you are audited, the more likely you are to be to keep your deductions . . and your money.
Many small landlords still try to keep books on slips of paper and determine profits by how much money is left in their pockets. Amazingly, some larger landlords do almost the same thing, even in this day of computer assisted bookkeeping and tax preparation. Small business people sometimes keep track of their finances in a slipshod manner because of what is certainly an understandable, but perhaps misguided, attempt to keep government from learning very much about their business. It has been our experience, however, that landlords and property managers who keep good books and use the deductions that are available to them do much better with the IRS and sleep much better at night than those who don't. There are still a great many incentives built into the Internal Revenue Code designed to promote housing, and particularly low income rental housing. Consequently, if real estate investors learn the rules and take full advantage of the deductions and tax credits, they will likely pay as little tax as those who try to circumvent the law and deal in cash whenever they can. An excuse often used for a lack of good accounting is an inability to keep books and the cost of hiring professional help. We believe that's balderdash and would like to help you get started. Rent Roll. Create a simple form, either on paper or in your computer, showing the building number, address, tenant information, move in date, security deposit amount, rent amount and, if applicable, the source of rent payments. We have included a sample of a Rent Roll from Cornerstone Management Company for you to compare or copy if you wish.
You are expected to have a receipt and deposit system for your collected rents. If you are audited, the IRS is likely to want to trace all your deposits. That means they will want to know where all the money came from and will want to know what happened to all the rents you received . . . or should have received. For example, they may look at a duplex where the rent is $500 a month. Your records show that one side was rented for 12 months and the other side for 11 months. They may track the deposits to see if you deposited 23 sets of rents, or $11,500. Any deviation invites them to dig deeper. The better your records, the less IRS auditors are likely to look for fraud or errors. Return to top Maintenance Log. A record of tenant maintenance complaints and the timely solution or resolution can save very expensive legal costs in the event of accidents on rental property to tenants or their guests. There are a great many other reasons for good maintenance records as well, including evictions and the IRS.
There are various ways to construct your log. One of us at RHOL uses printed two part work orders and puts a copy of it in the file for that building. Another property manager here uses a loose leaf note book with a simple form for each building.
Return to top Set up a Check Register. A check register, with good detail, is about all the actual bookkeeping that many small landlords need to do. Every check should be coded, or contain the kind of expense that the check paid. (when, who, what for & why) Every deposit of income should contain the same kind of information. Even if you don't deposit all of your income, it is a good idea to note the cash income and what you did with the cash in this same register, just don't carry the amounts over to your bank balance.
If you think you need to keep track of cash in a separate book, that's fine, as long as you actually write everything down so that you can have an accurate picture of what is really going on in your business. We all tend to lose track of cash, even substantial amounts. Return to top Keep every bill & receipt. Pay your bills by check or credit card whenever you can. That's pretty basic, and you probably do that already. However, the problem arises when you pay for something with cash from your pocket. After all, that $9.95 isn't worth charging or writing a check. WRONG!.
The reason for the check or credit card is that you have both the receipt and the canceled check or credit card statement. When you write a check, note what it's for on the memo line and always write the check number on the receipt. Use the same credit card for business purchases whenever possible.
If you can't resist, and pay by cash anyway, write the relevant address and purpose on the receipt. A box of receipts may become your most valuable asset in the event of an IRS audit, where you are forced to reconstruct what happened two years or more ago. A dated receipt also helps to show where you were and what you were doing if you need to reconstruct a portion of your mileage log. Some landlords I know collect receipts like more normal folks collect stamps, Pokemon or baseball cards.
When an IRS auditor sees that you have all your records in good order, with detail, and easily accounted for, they are likely to do a cursory check and move on to someone else. Return to top Bookkeeping Service RHOL surveyed several bookkeeping service and CPA firms. We were able to determine that the average cost for a typical landlord with four or five units, from accountants familiar with the rental housing business, is approximately $50 per month. That fee includes rent deposits, about fifteen checks a month and preparing the schedule E for the federal tax return. CPA firms charge about $150 per month for the same number of units, but they also offer many other valuable services for serious investors.
Return to top Do it Yourself Any landlord sophisticated enough to have found us on the Web, has enough computer literacy to keep their own books and prepare their own tax return using any of several good computer programs. We have used Quicken and Turbo Tax for years, two inexpensive and very popular programs for some initial examples in our site. Here's why: Back in 1988 I owned about 20 rental homes and was fascinated by computer technology. I checked out several property management programs and settled on one out of Santa Barbara, California that cost more than a thousand dollars and came packaged with a thick and difficult to understand manual. The program produced a lot of impressive forms, invoices, letters and reports. But it was so difficult to learn and use that I was unable to turn the work over to secretarial help.
About that same time I began using an off the shelf check register program, called Quicken, from a company named Intuit to keep track of my spending at home. It wasn't long before I discovered that I could do most of what I actually needed for my business in Quicken too. By sharing it around the office I also learned that anyone who could balance a check book was capable of using the program without real training, because it worked intuit-ively. 
It didn't take long to develop some little tricks to help Quicken keep track of our business and we totally dropped the expensive property management alternatives. Millions of other people apparently found the program as helpful as we landlords did, because the Quicken success story is now legendary. About half the world has discovered Quicken and their business upgrade QuickBooks. They are the most popular bookkeeping programs available.
One of the best tax preparation programs to come along at about the same time was TurboTax, by a company named ChipSoft. Their success also mirrors that of the home computer industry. In a brilliant move Intuit bought Turbo Tax and now allows Quicken and QuickBooks to export data directly to the tax program throughout the year so users have a huge tax planning, and later preparation, advantage. You can learn more about the products by visiting the Intuit Web site.
You will also note when you visit our page on rental housing software that several other landlords who had both computer and accounting skills adapted Quicken to property management and bookkeeping solutions for the small landlord. Some of them now offer property management programs that utilize your quicken data to vastly improve your effectiveness as a manager, at relatively low cost. You can check them out from our page on Property Management Software. Ok, so why is RHOL now pushing property management software?
There are now many good reasons to use property management software that were not there just a couple of years ago. Primarily because everything about using computers has become much easier. Old landlords are tough to teach, but we figured that if you were able to get on the Internet and find us, you must at least understand how to use your Web Browser. Consequently much of the new "Landlord" software is designed to look and feel a lot like your Web Browser. We believe that you can start using a powerful program to manage your properties, tenants and finances without ever having to read a manual or understand how it works. To summarize, ... do something. You can use a pencil and paper with a few simple forms like a rent roll, maintenance log and a check register. You can do a good bookkeeping job with an easy to use program like Quicken. But now you can also have the tools of the big guys, packaged in a program that you should be using successfully within a few minutes, without even resorting to the help menu. .
There are now a great many good property management programs available to fit the needs of all or us. You can check out the wide selection available on our Property Management Software page.
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