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How To Split Common Business/Personal Expenses For Bookkeeping
How rental property operations handle book keeping can be very different from standard businesses.
A big differentiator being how expenses are handled when the items paid for are used for both business and personal purposes.
For example, how do you make an accurate tax benefits assessment when a vacation home is rented out for 10 months during the years and used by yourself for 2 months?
Here are some of the most common business and personal is expenses and how they are generally split for accounting and tax reasons.
While a lot of people in the labor force have their vehicles provided for or paid for by the employee, it is very difficult to find someone who has not used the vehicle for personal use.
For the most part, employers are not too mindful with how cars as company resources are being exploited for personal use by employees.
But for specific types of businesses or due to decision making from top management, there must be a clear line that separates personal and business use.
And meticulous book keeping is what draws that line.
In real estate, a landlord might use the vehicle for business activities like:
- Site visiting
- Meeting potential tenants
- Meeting property agents
- Attend open houses
- Providing transport for tenants
- Trips to the hardware store for supplies
From a business accounting standpoint, any used of an automobile for the business is deductible as a business or investment expense.
A widely practiced way to precisely calculate deductibles is to keep track of the mileage used.
A log book is opened which tracks the dates, miles clocked, and the purpose of every trip.
It can then be easily determined how much of the vehicle is used for business and how much for personal.
Many landlords will agree that some of the coolest industrial grade equipment will be an overkill for typical residential households.
A rental property business however, provides the pleasant excuse of buying these equipment and machinery. Then use it on their own homes since the equipment are sitting in the garage when not used on rental property.
A lawn mower for example is something that should allow a rental property business to claim depreciation from.
It might be a straight forward case of calculation if the machine is purely used by the business. But the moment it is used personally, it complicates the accounting process.
If the break down of business and personal use is 50/50 straight down the middle, the calculation would be child’s play.
But what if the mower is used much more for business and very much less for personal?
A way to segment this usage is by the square feet area of the lawns in question.
For example, if your rental properties consist of 4,500sqft of lawn compared to 500 for the house, it is fair to say that investment expense would be 90%.
Another item that we love to charge to the company even if it’s for personal use is the telephone subscription.
Many business owners might feel that the telephone charges are negligible and one doesn’t need to go into so much details when book keeping.
Well, you would only say that if you don’t use much of the phone.
Many businesses make a flurry of long-distance and overseas calls. Surely the expenses being chalked up here will be significant enough to claim deductions?
And what if you are just a part time landlord who is renting out a room in your own house?
How would you split the telephone bills and internet data charges?
This is actually not an easy expense to solve unless you have a software that can keep logs of details on each call. Even then, there are privacy concerns to address.
The best way to manage this area is to keep separate lines for each purpose.
A line for business use, and a line for personal use. And if need be, a separate line for the tenant.
Anyway, with the constant new releases of eye-catching smart phones, you know that you are just waiting for more excuses to grab more of these gadgets.
Of all the expenses to track for clean book keeping, office supplies like stationary are the toughest to keep a breast of.
I can visualize you nodding in agreement as you think about the pens and staplers you have brought home from the office.
While these expenses can be considered minute to some, for the purpose of systematic record keeping, it is a good habit to practice. Should you eventually hire a book keeper to take over the books, you know you want him/her to be just as diligent.
A simple method to separate office supplies expenses is to keep the receipts and indicate items that are meant as personal expenses.
5) Home office
As you might suspect, every commercial space be it a retail shop, inventory warehouse, or office space will incur several types of expenses just to keep it running.
These can include:
- Utility bills
- Garbage disposal charges
- Insurance premiums
If you are running your business from home (a.k.a home office), the conniving thought of charging all your household expenses to the business might just casually cross your mind.
Sorry to burst that bubble.
But to qualify for home office deductions, a space has to be used by the business 100% of the time.
This means that a homeowner cannot charge all expenses as business expenses since he is living in the house as a resident.
What is allowed is to allocate a specific area like a guest bedroom that is used purely as a business office.
The amount deductible will then take the office space area divided by the total space in the house.
If the result is one-fifth, then it is fair to charge 20% of the expenses to the business.
Do think twice before going ahead with this. Because if you have gone through it just once, you might realize that the amount deductible is actually going to be quite small.
All that work for that little payoff can mean inefficient operations.