Health Check: Year-End Reporting
Have you considered the health of your Accounting Skeletal Structure? Not to get all serious on you, but if something as simple as your Chart of Accounts (GL Accounts) is cumbersome or too lean, you may want to consider a healthier process. See our previous blog post Accounting Skeletal Structure.
Skipping into the end of the year, year-end reporting is the end result of all the work you’ve completed throughout the year. Were you eating too much fatty foods, or well-balanced diet, or severe fasting?
Frankly, it’s pretty sad that a single piece of paper titled “Year End Statement” and an IRS Form 1099-MISC is the culmination of 365 days of accounting processes. Clients/owners may not see the years worth of experience, employee/vendor turn-over, late nights working with tenants to pay their rent through the COVID crisis and ensuring you’re managing your clients’ funds properly.
Base Line: Your Chart of Accounts is literally the directive to how all funds are treated on a single property. How income is reported, how liabilities are managed and how rent proceeds are spent on property expenses. There are items that you need to consider when it comes to trust accounting and IRS reporting.
GL Accounts operate by GAAP standards. I understand that NARPM and some databases like to specialize such methods, but at the end of the day, a CPA and the IRS are reviewing the end results of your work. Why not make it easier for your client by providing a clean, clear and concise year-end statement?
Anything the tenant pays is income. Period. No exception. Repeat that. Anything the tenant pays to the owner is classified as rental income (Box 1 Rental Income on F1099-MISC). Period, no exception. Don’t like it, take it up with the IRS.
If the tenant owes to the management company, it is also classified as income, just to the management company.
Anything the property pays to the management company or vendor is an expense. I think you get the idea.
Maintenance Repairs vs Replacement. Typically, when repairs are done to a property, the expense is categorized during the twelve month period. However, when a major cost associated to the habitability of the property, the expense may need to be classified as a capital expense. Example: HVA/C repair vs replacement. Another tip is when an appliance is replaced and the cost exceeds $500 should be classified as a capital expense. If a purchase of a new appliance is under this amount, it should be classified as a maintenance repair. You may speak with your tax professional for additional purposes for such classifications.
Is the tenant refunding the property/owner/management company for an expense? Reimbursing for utilities that were not transferred in time? For a disposal repair because the tenant keeps dumping rice into the sink? Yes? You guessed it, it must be classified as income, not a reduction of the expense.
Sometimes a tenant will pay January rent on December 31st at 11:58pm. Per IRS regulations, this is considered rent but is held as a liability until the income is used for the period it is intended. Property owners loath prepaid rent because they feel they’re paying more taxes on income they haven’t collected yet. However, they’ll be reporting 13 months of income one year, then the following year they’ll report 11 months. It all evens out eventually, but the last thing you want to do is omit prepaid rent on the year-end statements and IRS forms.
SFL K.I.S.S. Protocols
It is recommended that all property managers send out an PSA to their owners requesting any major changes in the last twelve months. Perhaps they moved, any new owners of the property, a new percentage split or in some cases, if the owner has passed and a new owner is responsible.
We advise our clients to inform their owners on what the IRS is expecting you to report and what it could potentially look like. Directing them to the IRS Publication 527 can help alleviate a lot of redundant questions later.
We’re in the 21st century now and the Postal Service is not as quick as an email. Requesting that your owners receive their year end statements and IRS form electronically will allow them to have access to it 24/7/365 and they don’t have to wait for it to show up in the mail. Let alone, the cost of the forms, envelopes and postage could be allocated to a truly happy hour!
“Try not to become a man of success. Rather become a man of value.” -Albert Einstein