Tax season, like winter in the hit HBO series Game of Thrones, is always coming. While the White Walkers, I mean IRS, might not scrutinize real estate investors’ tax returns with the same microscopic lense they did ten years ago, the chance you might be audited now is still around 2.5 percent.1 Of course, that percentage increases with the amount of income you report. Or if you report a loss. So be a boy scout; be prepared!
Check your degree of preparation with the following questions: Is your portfolio set up for success come tax season? Do your payments integrate well with your accounting software, or is bank account reconciliation a pain? Is accounting month end a consistently easy and accurate process? Is your payment data organized and accessible for at least seven years in case of an audit? If you’re unsure about any of your answers, keep reading. We’ll lay out our five best strategies for your tax season prep.
1. Get Proactive With Your 1099-Ks
If your company manages properties for multiple owners/investors, then you don’t actually “own” that property revenue. It has to shift from your books to the owners books via 1099-K. The 1099-K “Payment Card and Third Party Network Transactions” document is an IRS tax form that reports the gross amount of funds that were processed through a Third Party Payment Processor (TTP). You (or your clients) should receive one 1099-K for each entity that is set up within your payment processor’s system.
Find a payment provider who is flexible with 1099-Ks. Specifically, a partner who will send multiple 1099-Ks per entity (per bank account, for example), so you don’t have to do the heavy lifting. Some payment vendors report all of the revenue from your entire portfolio to the IRS in one lump sum, as if it was yours. Then you have to create and file the 1099-K’s yourself. Without the help of a tax-savvy payment processor, you’ll spend a lot of time offsetting revenue to your owners at the end of the tax year. The preferred option is to find a payment provider who understands the intricacies of 1099-K’s and can set you up for success during implementation.
If you already have a payment provider that creates and distributes your 1099-Ks for you, they should set up each tax ID per bank account in their system during your implementation. But if for some reason they didn’t, be proactive about submitting W-9s for each bank account now. Don’t get stuck in a last minute scramble trying to slice and dice your 1099-K to distribute to your owners/investors by the January 31st deadline. Skip the struggle, and get ahead of the game with a partner who prioritizes your business goals.
2. Plan A: Aim for a Perfect Integration
Back in the day, taking online payments was a novel concept. A payment facilitator would deposit money into your bank account without any integration component. Then a manager or staff member would have to manually key in each receipt into their accounting software. But now, online payments are a necessity. Almost every management company works with a provider to offer an online payment solution to their residents. And almost every payment provider can integrate with your accounting software. But the strength of the integration is what separates the good from the great, and determines the severity of your tax season stress. But with today’s saturated online payment market, how can you tell which payment facilitator will work best for your company? It all comes down to the sophistication of their integration with your accounting software.
A perfect integration means that every single deposit to your bank account will match exactly what is shown in your software. For instance, one single transaction can be made up of several different payment types, i.e. the first month’s rent, security deposit, application fee, etc. Those monies might look like one transaction in your payment software, but they are split into three separate deposits to three different bank accounts. Because these are seen as different types of revenues, all of that transaction information needs to be meticulously detailed by your payment provider, or you could get into legal trouble.
Save yourself the worry, and get a precise picture of your funds. Your integration should pull balance due info and populate resident payments directly to your accounting software. A seamless collection process frees you from manual data entry and ensures accurate payment data. With a smooth integration, all of that wasted time can be refocused on growing your business and increasing NOI.
3. Plan B: Because Technology Isn’t Perfect
Glitches happen. Even with a solid integration, occasionally payments will deposit to the wrong bank account. Some transactions might fail to integrate successfully, or a batch will be reported to the wrong accounting period. Don’t let small integration errors cause ripples that disrupt your books and increase your audit risk.
Let’s say you have a liability in your system (a debt, an invoice to a vendor, or a deposit which must be returned to the resident when they move out, etc), and that transaction is accidentally integrated to an operating ledger due to a faulty integration. Now those funds are misreported as revenue (an asset) instead of a liability, so you would have to scramble to correct this. Otherwise you’re on the hook to pay taxes for this misreported revenue. These types of errors can cause major headaches for you and your staff.
That’s why you’ve got to have a Plan B. Does your vendor have a catch-all for transactions that fail to integrate? For example, PayLease has a non-integrated transaction report to alert you if something goes wrong. That way you can try to re-integrate the payment, or worst case, manually key in that transaction before the batch closes.
What system do you have in place to catch inevitable issues and resolve them in a timely manner? Do you receive daily email notifications detailing your returned, voided, and non-integrated payments? Do you have a support team you can call or email to help resolve issues? Make sure your bases are covered, and always have a backup plan.
4. Own Your Accounting Month End
The IRS requires that businesses report earnings and pay their taxes annually or quarterly. Management companies typically follow the GAAP (Generally Accepted Accounting Principles) so that in the event their company is audited, they can explain the movement of their assets and liabilities. In order for you to report how much money a property earned in any given month or quarter, you need to be able to draw a line in the sand somewhere, a.k.a. accounting month end. But how can you do that if your website’s payment portal is always open and accessible?
We suggest you use a tool to help automatically close and post all batches on your selected cut-off time and date. For example, the PayLease Property Lock feature defines which accounting period revenue falls into. It essentially enables you to “pause” the integration of payments and deposits. It will close all external batches and internal deposits so that the transactions in your accounting platform match the money in your bank accounts. All the while, residents can keep making payments none the wiser.
5. Store, Search, and Locate Your Data
Find a partner who will store your data safely. According to Fundera.com, “you are required by law to retain and safeguard all records—in physical or electronic form—that you use to file your returns for at least three years.” However, some tax professionals recommend you keep records for seven years, just to be safe. Does your payment provider save all of your records for at least seven years? If they don’t, and you get audited, you could be in trouble.
In addition to saving all of your data, your payment processor should make it easy for you to locate the exact data you need whenever you need it. “Having everything at hand for the audit helps the process go more smoothly. Isolating the tax year in question in your accounting records—for example, by downloading the records for that specific year in your cloud accounting platform—is a very good idea.” –Fundera. When you access your payment platform, you should be able to plug exact dates into the search criteria for easy recollection of data. Because manually digging through years of transactional data does not sound like a fun time.
That’s All Folks
As we mentioned earlier, your chances of being audited are very low, but it doesn’t hurt to prepare for the worst. “Take the necessary steps to ensure you are accurately recording and reporting your business income and expenses each year. Using accounting software or engaging the services of an accounting professional to guide you through the complex tax landscape can help further ease your fears, as well as provide you with a valuable ally in the event of an audit.” –Fundera. Choose your tax ally wisely, and set yourself up for success. Because tax season… is coming.
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PayLease, LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is up-to-date as of May 2019. It is not intended to be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before taking any action.