Financial dealings in real estate go beyond basic income and expenses. Purchasing real estate, rent received, cost of maintenance, interest paid on mortgages, depreciation, selling real estate, and contractor payments may all affect the taxes of a real estate company. For small real estate companies, handling such issues along with running the business may be hard.
For any kind of real estate company whether they are managing or owning rental real estate, investing in commercial real estate or developing real estate, it becomes essential to have accurate tax records. Incomplete financial statements may become an issue while paying taxes.
This is why many small real estate businesses consider outsourced tax preparation for small business operations. Working with an external tax preparation provider can help organize financial information, prepare tax documents, and manage recurring tax-related tasks.
Why Real Estate Businesses Need Specialized Tax Preparation Support
These real estate businesses have financial responsibilities that might not be the same as other small businesses. Their sources of income may be rent income, income from property sold, lease commissions, management fees or development projects.
However, their expenses may include maintenance of the property, insurances, utility expenses, mortgage interest, professional expenses, advertisements and the management of the properties.
The taxation on these activities will depend on the type of property, mode of doing business, ownership structure of the firm and the applicable tax regulations. It means that the rent income of property and the income from the sale of the property have different accounting treatments.
It can be quite difficult for small business firms conducting the activity themselves to keep adequate records all year round. This is where outsourcing tax preparation services comes in handy.
How Outsourced Tax Preparation Supports Real Estate Businesses
Tax preparation outsourcing means delegating some tax-specific duties to an external entity. It depends on the capabilities of the outsourcing party and may include document preparation, analysis of financial records, tax return preparation, and any other tax-reporting related services.
There are numerous areas of tax assistance which can be offered to real estate companies.
Preparation of Rental Income and Expenses
Income received from renting out properties typically originates from different renters, property types, and rental agreements. Expenses to account for include, among others, repairs, maintenance, management fees, insurance payments, utility bills, and other payments.
The tax preparation firm can assist in organizing those documents which will be needed when preparing a tax report. Separate accounts for each property will facilitate analysis of the company's financial position.
So, the small business owner operating several rental properties has to prepare rental income and expense statements for each property separately.
Managing Property Depreciation Records
Firms engaged in the real estate business where the firm holds the investment and business properties which qualify for depreciation under the tax law need to take into consideration depreciation.
However, the following factors are relevant in making depreciation of any asset: the timing of the placing of the property in service, the classification of the property, improvement to the property and recovery period of time. Normally, land cannot be depreciated, but certain portions of the building can be depreciated if the situation meets certain criteria.
Tax preparers may assist in finding the information from the records of the assets and even prepare the depreciation schedule.
Tracking Property Sales and Capital Gains
The transactions wherein real estate companies buy and sell properties may be an integral part of the company’s investments and operations and can comprise of purchases, sales, improvement activities, and other transactions that affect the basis of the property from a tax standpoint.
A professional tax preparation company will help in organizing documentation associated with the acquisition, sales, improvements, and other costs that were paid. The documentation might be valuable for establishing the gain or loss.
Depending upon whether the property was purchased as an investment, to be used in the course of business, or as inventory of a real estate developer, different kinds of tax treatments may apply.
It is essential for the business to ensure that the tax preparer understands the nature of their property transactions.
Benefits of Outsourced Tax Preparation for Small Real Estate Businesses
Small real estate companies will have few administrative personnel members. Outsourceable tax preparation services will allow the company to cope with repetitive processes without creating an enormous tax department.
Reduce Administrative Load
Collection of receipts, organization of property expenses, examination of financial statements, and preparation of documentation for tax purposes require much effort. The owner may have difficulties performing all these actions in addition to other duties that include interactions with tenants, property transactions, contractors, and customers.
The tax preparation services will make it possible to organize necessary information and documentation. It will allow reducing the number of administrative activities that have to be performed internally.
Improve Accuracy of Taxation Records
Incomplete or inaccurate records may create additional complications in the tax preparation process. For example, it might be difficult to distinguish between the repairs of the property and its capital improvement or to track expenses of a particular property.
Organization of tax preparation process will allow organizing the necessary financial documentation and identifying missing information. Examination of the transactions throughout the year can also help not to make the last-minute adjustments.
Identify Applicable Tax Deductions
Deductible expenses may be different for the real estate business depending on the nature of its operations and tax laws at the moment. The deductible expenses may consist of property management costs, insurance, repairs, mortgage interest, advertising expenses, utilities, and fees for professional services.
A professional tax consultant will be able to review the business documents and find out which expenses are possible to use as deductions. All the expenses related to the property cannot be immediately deducted. There are some expenses that should be capitalized.
Good documentation will be helpful in proving the deductibility of the listed expenses.
Better Management of Tax Deadlines
The small real estate business may have various deadlines depending on its organizational form, number of employees, and operations.
The outsourced tax expert will be able to provide a checklist of documents needed for tax filing and find the deadlines. However, it will be up to the owner of the business to make sure the timely filing and payment.
Choosing the Right Tax Preparation Provider for a Real Estate Business
Not all tax preparers understand property transactions. Maybe you need to consider getting a professional who understands and has some experience with the real estate tax.
The factors that one needs to consider while selecting the provider include:
- Experience in the real estate business: Consider using a professional with skills in handling issues related to rental of the property, sales of property, depreciation, improvement, and management of investment properties.
- USA Tax requirements: Consider a provider with a good understanding of tax requirements of the federal government and the respective state.
- Software compatibility: Check whether the provider uses the accounting software that you use such as QuickBooks Online.
- Privacy and Security of data: Check whether the provider has good policy regarding confidentiality, document sharing, and management of financial information.
- Scope of services: Understand what service exactly includes.
- Communication and Deadlines: Decide when you will submit documents, time taken to review and turnaround period of the documents and document filing and payment.
Moreover, you must clarify who will be reviewing and signing the tax return and their qualification.
The right provider should have the necessary information on the real estate transactions, U.S. tax codes, documentation, and the ownership of the business. If the records are properly kept, and the necessary help is obtained, real estate businesses will be able to pay their taxes in an organized manner.
The Fino Partners offers accounting outsourcing services for the consideration of real estate businesses. Feel free to contact the experts for further inquiries on accounting and tax preparation services.
