Business overhead expenses on a Schedule E

Tax, SDIRAs & Cost Segregation
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Business overhead expenses on a Schedule E

Jeremy Zindel
Rental Property Investor 路 Decatur, IL 路 Member since 2012 路 82 posts 路 30 votes

Just wondering what the correct way is to handle business overhead expenses for my rental properties when it's time to account for those expenses at tax time? (i.e. cost for business PO box, Quickbooks, miscellaneous office supplies, RE license fees, LLC annual fees, etc.) Do you just divide the costs up evenly between your Schedule E's for each property or is that not how it is supposed to be done?

To further complicate the initial question, how would you handle an expense that had to be capitilized, say a new computer for example. Would you split the total cost up as separate 5-year property depreciation line items on each of your Schedule E's?

I have an appointment to meet with a CPA coming up but I was curious if anyone out there had any input so I can be a little more educated when I go in for that meeting. Thanks!

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Jason Chu
Member since 2018 路 6 posts 路 2 votes
8y

I am wondering if there has been any real solid resolution on this topic.  My CPA has instructed me that the auto expenses (at least the proportion used for rental activities), overhead such as office supplies, software, tax preparation, and other items which occur to operate the rental properties (AS A WHOLE) are expensable on Schedule E relative to the activity (e.g. based on number of units per property) by "cost accounting or cost allocation".  Specific repair projects and supplies, maintenance that are property specific are listed on the Schedule E for each respective property.  The cost allocated overhead is divided based on number of units across multiple properties and added in.  Where there is some additional questions are whether items like health insurance for myself and my wife (the premiums not the actual medical expenses) would be considered part of this overhead (in the past we HAVE NOT put this into the "cost allocated" calculations for Sch E but instead listed them in Sch A.  I have seen on this website answers both ways regarding this (the site administrator saying leave it in Sch A, and his colleague (also a enrolled agent) advising that it can be written off in Sch E, but that there are certain restrictions mainly -- you must have passive activity gains where the deductions are covered (no passive activity loss carry over allowed.  The enrolled agent on this site also goes onto state there is case law (court decisions) that were in favor of cost allocation on Sch E, but the actual cases were not cited, and that if you were "aggressive and willing to fight with the IRS" the case law might actually support this.  I don't know about any of you , but I'd like to honestly get the deductions I am entitled to, pay my fair tax, and avoid any issues with the IRS, but not aggressively seek their scrutiny or wrath.  The same enrolled agent also suggests that opening a 'property management' business should allow the deduction of the overhead 'cleanly', but frankly creating a Sch C business with only overhead expenses to support Sch E activities seems to be 1) a HUGE RED FLAG as there is NO INCOME to the business created, and only expenses incurred over SCH E activities only.  What that effectively means is that a NEGATIVE INCOME (read LOSS) on SCH C occurs every year -- A KNOWN RED FLAG.    To add another twist to this, it seems that Real Estate Licensees get special consideration as rental activities including acquisition, sale, and management of those rental properties may be considered NON PASSIVE (active) due to the professional occupation. -- I am a real estate broker.  This grey area of filing really needs to be made more clear.  The expenses are real.  They are rental related only, but not being able to clearly know where to file them in SCH A, SCH C, SCH E, really is a big problem and audit risk.  Big companies have COGS and Overhead cost accounting and allocations, why are landlords who actively manage their properties left in the murky water by the IRS?  Why do 2 different CPAs and an enrolled agent disagree?  Please help.... if you can cite case law, publications from the IRS, or anything that will give reference and cited guidance in this matter, I am sure all landlords out there would be appreciative and rendered better tax filers and tax payers as a result.

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  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent 路 Grayslake, IL 路 Member since 2011 路 5k+ posts 路 2k+ votes
    12y
    Originally posted by @Jeremy Zindel:
    Just wondering what the correct way is to handle business overhead expenses for my rental properties when it's time to account for those expenses at tax time? (i.e. cost for business PO box, Quickbooks, miscellaneous office supplies, RE license fees, LLC annual fees, etc.) Do you just divide the costs up evenly between your Schedule E's for each property or is that not how it is supposed to be done?
    To further complicate the initial question, how would you handle an expense that had to be capitilized, say a new computer for example. Would you split the total cost up as separate 5-year property depreciation line items on each of your Schedule E's?

    I have an appointment to meet with a CPA coming up but I was curious if anyone out there had any input so I can be a little more educated when I go in for that meeting. Thanks!

    Jeremy,

    For what reason do you have your RE license? If it is to acquire more property, it would be reported on the same line as your commissions. Yes, they would be divided between all of the properties unless it is unreasonable to do so. In which case you would pick the most relevant property. If you are a real estate professional it is common to group them together in one extra category.

    [email protected]224-381-2660
    0Reply
  • Jeremy Zindel
    OP
    Rental Property Investor 路 Decatur, IL 路 Member since 2012 路 82 posts 路 30 votes
    12y

    Thanks Steven. I don't actually have my RE license yet. I'm about a quarter of the way through the pre-license coursework right now and will be taking the test this spring. The cost of the course itself is all I have to expense for my 2013 taxes. And yes, the reason for obtaining my license is to be able to look at and make offers on properties on my own. I have no desire to list properties or work as a buyer's agent.

    Unfortunately no RE professional status for me yet... still working the 8 to 5 at this point. At some point the goal will be to go full time into REI but i'm just not there yet.

    Any thoughts on an expense that must be depreciated over X number of years? Still just divide up between all the properties?

    0Reply
  • Thomas MorrisPro Member
    Investor 路 Bowling Green, KY 路 Member since 2013 路 61 posts 路 16 votes
    12y

    I have the same question. I have tentatively put those general expenses in as business expenses. However, this may not be ideal. I Would like to hear more thoughts, ideally from a CPA!

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent 路 Grayslake, IL 路 Member since 2011 路 5k+ posts 路 2k+ votes
    12y
    Originally posted by @Jeremy Zindel:
    Thanks Steven. I don't actually have my RE license yet. I'm about a quarter of the way through the pre-license coursework right now and will be taking the test this spring. The cost of the course itself is all I have to expense for my 2013 taxes. And yes, the reason for obtaining my license is to be able to look at and make offers on properties on my own. I have no desire to list properties or work as a buyer's agent.
    Unfortunately no RE professional status for me yet... still working the 8 to 5 at this point. At some point the goal will be to go full time into REI but i'm just not there yet.

    Any thoughts on an expense that must be depreciated over X number of years? Still just divide up between all the properties?

    Jeremy,

    Are you already investing in RE at all?

    If not:
    Unfortunately, you cannot deduct the cost of the initial education in learning a new field for a job change. You may consider capitalizing some of your expenses while you are working to complete everything required.

    If so:
    You will want to capitalize these costs until the time as you start to bring in income, then you may deduct your startup costs to the applicable threshold and then you will capitalize anything above that point.

    [email protected]224-381-2660
    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent 路 Grayslake, IL 路 Member since 2011 路 5k+ posts 路 2k+ votes
    12y
    Originally posted by @Thomas Morris:
    I have the same question. I have tentatively put those general expenses in as business expenses. However, this may not be ideal. I Would like to hear more thoughts, ideally from a CPA!

    Thomas,

    Unfortunately that post above also applies to you.

    [email protected]224-381-2660
    0Reply
  • Thomas MorrisPro Member
    Investor 路 Bowling Green, KY 路 Member since 2013 路 61 posts 路 16 votes
    12y

    Actually, I am in a different situation. I have expenses that apply to the whole of my rental property business, such as computer, training, advertising and legal expenses. This is not related to obtaining a Real Estate License, but to running the rental property business. I currently am claiming these expenses on form 1065 line 20 (Partnership return). I am wondering if this is acceptable. I have the Nolo Landlord Tax book that says these are legit expenses, but it really doesn't give any guidance as to where they should be claimed. If I apply them to my rental properties, do I divide them by the number of properties and apply them equally? Or do I pick one property to apply them to?

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent 路 Grayslake, IL 路 Member since 2011 路 5k+ posts 路 2k+ votes
    12y
    Originally posted by @Thomas Morris:
    Actually, I am in a different situation. I have expenses that apply to the whole of my rental property business, such as computer, training, advertising and legal expenses. This is not related to obtaining a Real Estate License, but to running the rental property business. I currently am claiming these expenses on form 1065 line 20 (Partnership return). I am wondering if this is acceptable. I have the Nolo Landlord Tax book that says these are legit expenses, but it really doesn't give any guidance as to where they should be claimed. If I apply them to my rental properties, do I divide them by the number of properties and apply them equally? Or do I pick one property to apply them to?

    Thomas,

    That is excellent. The fact that you are already involved in RE make education expenses deductible.
    Yes, it would be taken overall across all properties. Certain items make more sense to pick a property. Others you may want to capitalize.

    [email protected]224-381-2660
    1Reply
  • Thomas MorrisPro Member
    Investor 路 Bowling Green, KY 路 Member since 2013 路 61 posts 路 16 votes
    12y

    Thanks. Although to my logical brain, it makes more sense to segregate those expenses that apply across the board, I'll give the IRS what they want. :)

    I have some across the board items that I have capitalized, but again I was separating them from my rental properties. I guess I need to put my computer equipment under a specific property even though I use it for all the properties.

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent 路 Grayslake, IL 路 Member since 2011 路 5k+ posts 路 2k+ votes
    12y
    Originally posted by @Thomas Morris:
    Thanks. Although to my logical brain, it makes more sense to segregate those expenses that apply across the board, I'll give the IRS what they want. :)

    I have some across the board items that I have capitalized, but again I was separating them from my rental properties. I guess I need to put my computer equipment under a specific property even though I use it for all the properties.

    If it is related to an entirely different type of investing/business you will want to segregate it.

    [email protected]224-381-2660
    0Reply
  • Jeremy Zindel
    OP
    Rental Property Investor 路 Decatur, IL 路 Member since 2012 路 82 posts 路 30 votes
    12y

    Steven: Yes, I bought my first property in Nov of '12 so it sounds like I divide up my overhead expenses between my properties as I already handled my startup costs on my 2012 taxes.

    Thanks for all the input. I really appreciate it.

    0Reply
  • Andy Robison
    Investor 路 Kansas City, MO 路 Member since 2013 路 465 posts 路 170 votes
    12y
    Originally posted by @Thomas Morris:
    Thanks. Although to my logical brain, it makes more sense to segregate those expenses that apply across the board, I'll give the IRS what they want. :)

    I have some across the board items that I have capitalized, but again I was separating them from my rental properties. I guess I need to put my computer equipment under a specific property even though I use it for all the properties.

    Dont give the IRS what they want... gruggingly fork over what they demand. If you give them what they want say good by to 100% of your income ;)

    1Reply
  • Mat O'Grady
    Investor 路 North Stonington, CT 路 Member since 2014 路 393 posts 路 228 votes
    11y

    Hello @Steven Hamilton II 

    I was looking for an answer to my question which is similar to the ones asked above.

    Just to clarify, if I have two rental properties, do I need to split the repairs up by property?

    I bought a bunch of stuff I needed to keep the properties up to par. I know I have to separately depreciate appliances, but I was unsure if I could file things like painting supplies etc. under one schedule E.

    Should I split the receipts up by property and file them per each schedule E or can I just put all the stuff together on one schedule E?

    Thanks,

    Mat

    0Reply
  • Steven Hamilton IIPro Member
    Accountant, Enrolled Agent 路 Grayslake, IL 路 Member since 2011 路 5k+ posts 路 2k+ votes
    11y

    Yes, they must always be kept per property.

    They need to be separately listed property addresses on Schedule E

    [email protected]224-381-2660
    0Reply
  • Brian Andrews
    Investor 路 Clinton, TN 路 Member since 2015 路 17 posts 路 4 votes
    10y

    I realize this is an old post, but it was exactly what I was wanting to know. I was putting all my overhead on one property, but that makes that property look like a loosed. Now I am splitting my overhead expenses over every property.

    I realize this is a new rule that wasn't true when this post started, but most computers can be expensed in the year they are bought. If your computer is to expensive (I think it is over $2000, but can't remember now) to expense in one year...I have a property I want to sell you... 馃槅

    0Reply
  • Jason Chu
    Member since 2018 路 6 posts 路 2 votes
    8y

    I am wondering if there has been any real solid resolution on this topic.  My CPA has instructed me that the auto expenses (at least the proportion used for rental activities), overhead such as office supplies, software, tax preparation, and other items which occur to operate the rental properties (AS A WHOLE) are expensable on Schedule E relative to the activity (e.g. based on number of units per property) by "cost accounting or cost allocation".  Specific repair projects and supplies, maintenance that are property specific are listed on the Schedule E for each respective property.  The cost allocated overhead is divided based on number of units across multiple properties and added in.  Where there is some additional questions are whether items like health insurance for myself and my wife (the premiums not the actual medical expenses) would be considered part of this overhead (in the past we HAVE NOT put this into the "cost allocated" calculations for Sch E but instead listed them in Sch A.  I have seen on this website answers both ways regarding this (the site administrator saying leave it in Sch A, and his colleague (also a enrolled agent) advising that it can be written off in Sch E, but that there are certain restrictions mainly -- you must have passive activity gains where the deductions are covered (no passive activity loss carry over allowed.  The enrolled agent on this site also goes onto state there is case law (court decisions) that were in favor of cost allocation on Sch E, but the actual cases were not cited, and that if you were "aggressive and willing to fight with the IRS" the case law might actually support this.  I don't know about any of you , but I'd like to honestly get the deductions I am entitled to, pay my fair tax, and avoid any issues with the IRS, but not aggressively seek their scrutiny or wrath.  The same enrolled agent also suggests that opening a 'property management' business should allow the deduction of the overhead 'cleanly', but frankly creating a Sch C business with only overhead expenses to support Sch E activities seems to be 1) a HUGE RED FLAG as there is NO INCOME to the business created, and only expenses incurred over SCH E activities only.  What that effectively means is that a NEGATIVE INCOME (read LOSS) on SCH C occurs every year -- A KNOWN RED FLAG.    To add another twist to this, it seems that Real Estate Licensees get special consideration as rental activities including acquisition, sale, and management of those rental properties may be considered NON PASSIVE (active) due to the professional occupation. -- I am a real estate broker.  This grey area of filing really needs to be made more clear.  The expenses are real.  They are rental related only, but not being able to clearly know where to file them in SCH A, SCH C, SCH E, really is a big problem and audit risk.  Big companies have COGS and Overhead cost accounting and allocations, why are landlords who actively manage their properties left in the murky water by the IRS?  Why do 2 different CPAs and an enrolled agent disagree?  Please help.... if you can cite case law, publications from the IRS, or anything that will give reference and cited guidance in this matter, I am sure all landlords out there would be appreciative and rendered better tax filers and tax payers as a result.

    2Reply
  • Account Closed
    Rental Property Investor 路 Braselton, GA 路 Member since 2017 路 11 posts 路 2 votes
    6y

    Jason Chu's post here warrants an answer and I have the same issue. 20+ units, 750+ hour real estate professional, but all income comes from rentals.

    Do expenses fall to E or C?

    0Reply
  • Natalie KolodijBusiness Member
    Moderator
    Tax Strategist| National Tax Educator| Accepting New Clients 路 Member since 2014 路 3k+ posts 路 4k+ votes
    6y

    They are still on E. 

    Being a real estate professional doesn't shift the form for reporting. You report on E. 

    Podcast Guest on Show Pay Less Tax to the IRS This Year With THESE Real Estate Tax Strategies
    Kolodij Tax & Consulting
    WebsiteView Page
    1Reply
  • Account Closed
    Rental Property Investor 路 Braselton, GA 路 Member since 2017 路 11 posts 路 2 votes
    6y
    Originally posted by @Natalie Kolodij:

    They are still on E. 

    Being a real estate professional doesn't shift the form for reporting. You report on E. 

     Thank you @Natalie Kolodij !

    0Reply
  • Ken Weiner
    Rental Property Investor 路 Los Angeles, CA 路 Member since 2015 路 30 posts 路 56 votes
    6y

    For expenses that apply to more than one property, I decide whether the expense is applicable to all my properties (e.g. tax preparation fee, a new computer, etc.) or a subset of my properties (e.g. registered agent fees in a specific state, apartment association dues in a specific city, travel to a specific city, etc.). Then I split the expense among these properties in my bookkeeping which results in the expense also being split on my Schedule E.

    Since the amounts assigned to each property must add back up to the original expense, I use a simple web page called Divide Money ( https://divide.money/ ) to calculate the amount to assign to each property down to the penny.

    For example, if I have to divide $234.23 among 5 properties, it would look like this:

    $46.84 to Property 1

    $46.84 to Property 2

    $46.85 to Property 3

    $46.85 to Property 4

    $46.85 to Property 5

    0Reply
  • Maria G.
    Rental Property Investor 路 Northern California 路 Member since 2017 路 129 posts 路 20 votes
    6y

    @Ken Weiner (and everyone who many know!): Good idea about splitting it among your properties. 

    I have a simpler question: In what category should I expense a new computer that I bought this year? In looking at the list of expense categories, the closest one I find is supplies, but I know a computer is not considered a supply. I'm using TurboTax. I tried to do it directly on form 4562, but it didn't let me, so I guess that one is autogenerated after some other election. I wish it'd be as easy as knowing it is a repair or a maintenance expense :)

    Thank you. 

    0Reply
  • Ken Weiner
    Rental Property Investor 路 Los Angeles, CA 路 Member since 2015 路 30 posts 路 56 votes
    6y

    @Maria G. I would put the new computer expense, as with everything else that doesn't fit into one of the categories, under "Other".

    0Reply
  • Maria G.
    Rental Property Investor 路 Northern California 路 Member since 2017 路 129 posts 路 20 votes
    6y

    @Ken Weiner: From what I was told by a TurboTax community pro, the place to put it is as an asset along with the rental properties and then choose to use "Section 179" (to take the full deduction in one year).

    0Reply
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