If you cringe at the thought of bookkeeping, you are not alone. Many would rather have a root canal than tackle the tedious task of keeping the books for their rental business. Even though it’s not fun for most of us keeping accurate and up to date financial records is important and can save you a lot of expenses in accounting time later. Here are several common bookkeeping mistakes made by landlords.
Mistake #1: Using the “Bag or Bin” Filing System
A garbage bag or random box does not qualify as a filing system. Dumping everything into one place for a year and then handing it off to your CPA does not help anyone. Your filing system does not have to complex, but you need to have one.
A basic system that is relatively easy to keep up with a four-folder system. The first folder is for all of your tenant paperwork including leases, applications, etc. If you have multiple properties, you should have a separate folder for each of your tenants
The second folder is designated as your legal folder and is for your mortgage information, insurance paperwork and any other legal documents. Again, have one for each property.
The third folder is for any and all receipts for anything you spend money on that pertains to that property over the course of the year. Every receipt. For. Every. Thing. If you do have multiple properties, it is advisable that you store your receipts by month. You will need one folder for each month of the year and any receipts for purchases in a certain month go in that folder.
The fourth folder is for everything else that doesn’t fit into the first three. For example, you might put manuals for appliances, warranties for the new furnace you had to install or quotes for repairs you might want to do later.
Mistake #2: Using Your Personal Bank Account for Your Business
It is massively time-consuming to try and separate personal and business expenses for the entire year. And yes, you do have to separate them come tax time. So save yourself time and keep them apart from the get go. The IRS loves it when people blend them together; it gives them the right to go through your personal spending without having to make a separate inquiry.
Mistake #3: Running Personal Expenses Through Your Business Account
Again, you need to keep your business and personal finances totally segregated. The IRS wants to see that if you are getting the tax benefits of having your own business, you are actually running said business. Additionally, it is harder to see if you are making a profit when you are looking at just business numbers.
Mistake #4: Ignoring Your Books all Year Long
We understand how arduous you find it to do books, but it is vital you do them regularly. Ideally, you should be entering expenses and income and reconciling your books monthly. It isn’t nearly as painful when you do it consistently; the paperwork won’t build up and feel as overwhelming.
Your rental is a business, and it is important to treat it as such. You will be much happier at the end of the year when the bill from your CPA is smaller, and you get to claim more deductions because you kept all of the receipts.