Tax Time Doesn’t Have To Be A Nightmare
By Paul Esajian on March 24, 2014
Tax time can either be a day of glorious anticipation where you can take a trip or pay off some debts with your refund money or it can be a period of extended doom. For most investors this is very much on the latter side where preparing their taxes can be a very overwhelming and expensive proposition. How you file your tax returns and the contents very greatly from investor to investor but one thing is very certain: the more prepared you are throughout the year the better position you will be in to maximize your return.
The single biggest issue with most people who work for themselves is organization and preparedness. Most investors and businesspeople in general are very good with numbers yet extremely poor with their record keeping. You don’t have to have an elaborate spreadsheet detailing each debit and credit (although this would be helpful) but you need to have some system in place documenting your spending. Each deal should be treated as a separate entity with a list of all expenses clearly outlined. This may take a little more time as you go but the alternative is trying to retrace your steps every three months or even worse at the end of the year.
Any system that can track your expenses works. The goal of tracking is not necessarily to see how you run your business but where you can maximize deductions and to reduce your chances of getting audited. If you have every gone through an audit you would know that this is not a fun exercise. You will have to dedicate weeks and even months to gathering documents or you accepted the penalty and move on. Neither scenario is very appealing and can be alleviated by simply recorded your expenses and being able to retain them when necessary.
In addition to record keeping you should have fairly regular communication with your accountant throughout the year. If you are closing multiple deals you should reach out to them after every deal and ask how you should pull money out and what entity the properties should be in. They may also be able to provide you a checklist of what they will need after every closing for tax time. The HUD 1 settlement statement, possibly a copy of the contract and any receipts or other documentation showing work done on the property are the usual items needed but there could be more on any given property. If you do not keep up with this during the year your tax season will be burdened with weeks of document gathering.
If you are not comfortable enough calling your accountant throughout the year if you have questions you may want to think about working with someone else. Your accountant is there to protect you and your interest and for that service you compensate them very well. They certainly earn their money but you should be able to reach out to them when you have a question and not have to wait days for the answer. This communication is very important and will definitely save you come tax time.
If you do the little things over the course of the year, you should not have to fret when tax time comes. Increased record keeping and communication should make your next tax season an easy one-or as easy as it can be.