7 Things Investors Should Do Right Now to Get Ready for Tax Season

Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisor regarding your specific situation.

OK, it’s 2020 now believe it or not! How 2019 flew by!

The new year will bring new opportunities for investors, but it also brings another dreaded tax season. Taxes have a way of sneaking up on us all and stressing even seasoned investors out—especially when we might not have everything we need at our disposal.

When investing and running a business, we do seem to let the financial prep and follow up slip just a little. It’s human nature.

There are important financial papers to have on hand though to make this all a little easier. There are also certain guidelines that one should follow. Below are a few that investors can use to ease into tax season.

7 Ways to Make Your Life Easier Come Tax Time

If you haven’t already, establish a good relationship with a certified public accountant (CPA) who is either an active investor themselves or has significant experience working with real estate investors. Having a portfolio of real estate investors is a good gauge of their merit, and if they have experience in financial planning, that is even better.
Compile all receipts from last year. This includes all medical and business expenses. Business expenses vary from booking a conference room to ordering company flyers. There can be prerequisites on the medical expenses with certain thresholds to be met in order to claim these, but please include them, as you might meet the requirements. Your CPA will guide you here, as these may change yearly.
Create a list of all tax-related documents that you should have and ensure that you have them before submitting them to your chosen CPA. These tax forms can include:
1. Prior year Form 1040, Individual Tax Return. This is must-have for most. Form 1040-ES, Estimated Tax (if applicable)
2. Form 4506-T, which is a request form for a transcript of previous tax returns in case you have lost yours or need an extra copy.
3. Form W-9 is simply a taxpayer ID number identification form, which you should already have before investing. This is a version of the W-7 but used for those that are independent contractors who have been paid over $600 by you, and therefore are subject to a 1099.
4. Form 1099 is simply an independent contractor withholding form for the taxes you are required to withhold if you have employees.
5. Form W-2 for the withholding of any wages if you’re working full-time for someone else.
  (NOTE: This is by no means a full list meant for every investor. The IRS also changes regulations and timeframes from time to time. A good CPA is needed above all else to ensure you’re staying compliant and they are staying abreast of all real estate-related and personal tax law changes. All investors have different circumstances and will need different forms. All these forms, however, are available for download and printing on IRS.gov, which is the Internal Revenue Service itself. There is a phone number there also to call for assistance in selecting forms.)
Your income and expense report. Any accountant will need this! Update it if necessary and check that all receipts for any deductions are included in it, as well as all income from any source. Mileage is often overlooked and can be a great deduction. Using an app, such as Mileage IQ, can assist with the process of keeping an exact mileage record. All business income and expenses are important!
Have notes for a discussion on future financial planning, such as perhaps putting some earned monies into either an existing or new Roth IRA, 401(k), or other account that you might already have. If you don’t have any, discuss starting retirement accounts and associated benefits. Tax forms and deadlines specifically for these types of investments exist and are explained further in this article. Information on these should also be discussed with your CPA.
If this is a new CPA, you certainly must bring a copy of last year’s tax return! If you can’t find it, as mentioned above, Form 4506-T, on the IRS Website can be used to request a copy/transcript.
Also, discuss with your CPA whether an extension would be advisable or even necessary for you, especially if any documents, receipts, or expenses are missing. An extension is widely accepted by the IRS and any good CPA will advise if this is advantageous. Haste can make waste with taxes! Keep in mind, filing for an extension doesn’t exempt you from paying taxes on time. In other words, your CPA must estimate how much you may potentially owe in taxes and send such payment with your extension.

Extension times for filings are generally available but vary depending on the type of return. Deadlines are as variable as the forms:

Forms 1040 and 1041 are due on April 15. Extensions until October 15 if using a calendar year. Use of a fiscal year deadline requires discussion with your CPA or the IRS. Estates and trusts using a 1041 can also be governed by a fiscal year extension.
Form 1065 is due on March 15, with extensions until September 15.

Be aware that, depending on where you are located, there can be state tax filings and even municipal filings. Don’t overlook these! A good CPA will typically file it on your behalf.

If payment of any taxes is difficult, it can be wise to file anyway and set up a payment plan rather than make no payment at all. Investors should look to their CPA to calculate an estimated payment.

The IRS does charge a penalty for late filing but can be cooperative if at least some type of communication occurs with them in the form of a request for an extension. Penalty interest that accrues can be avoided if efforts are at least made to file for an extension in a timely manner.

So, to conclude, a good CPA is always a must-have. Delaying tax filings or tax payment is never a good idea. Keep records all year long (as precisely as possible!), have notes to discuss all issues as soon as possible with your real estate-savvy CPA, and IRS tax problems can be avoided. Organization and thoroughness make for less stress!

Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisor regarding your specific situation.

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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.