started an LLC, actively working on the renovation of SFR #2 (about $17k of anticipated reno costs). Daily trips to the home store for materials and doing all the work myself. Random piles of receipts, some probably still in random pockets :). paid a few people cash for labor. gonna need a large amount of labor shortly, typically hire friends and pay them cash.
I typically just go to H&R Block, another bad move?
I have a bad feeling that I am screwing myself. I go to the home store daily, sometimes more then once. do I really need every receipt? I have a dedicated credit card ONLY for reno stuff, would be great if i could just use the end of year statement as my list of costs but i have a feeling that isnt good enough.
also, how bad is it to pay cash to a friend for labor, tax wise? typically a few thousand per year is what it adds up to @ $15/hr. is this money going to show as a profit even though it was actually 100% an expense??
and.... who does your taxes? im guessing not H&R block :)
You will definitely want to separate your personal and business accounts (never co-mingle them).
Yes, keep all receipts - get in the habit of taking letter-size manila envelopes (the kind with the fastener) for each property in your vehicle. Then when you get back to your vehicle after leaving Menards, HD, etc., take a minute to put the receipt in the corresponding envelope. Eventually, you can maybe look at taking pics of your receipts (there are some good apps out there for this as well) so that you can streamline the recordkeeping. But manila envelopes are a good start. Just make sure you set aside some time each week to organize and track your expenses/receipts, otherwise it will become a monster that you will put off until it is a gigantic mess (or at least that's what I used to do). It's good to have all rehab expenses on one card for tracking purposes. There are probably people much better at recordkeeping on BP than me, but you have to find things that work for you personally.
If you keep at this and it grows into a larger business, you may consider shopping around for a more seasoned CPA (nothing against H&R block). I have used Jim Tichota at Lutz & Company (off Dodge & 132nd) for years. I pay quite a bit for my tax prep, but my files have grown more and more complicated over the years.
Feel free to send me a PM if you'd like to talk offline - I'm happy to share my experiences (good and bad) with this.
You should get very organized. Keep receipts. Use software or make a spreadsheet that keeps track of all your expenses and the categories of these expenses such as the following: Repairs, parking/tolls/gas, legal fees, donations, etc (my list is longer but can't remember right now)
I have a great CPA that specializes in RE businesses. He did my personal taxes, fiancee's personal taxes and the LLC's taxes for $800. Sounds like a lot when you're used to TurboTax prices, but it was worth it for the accuracy and the amount of money he found for us!
If you pay cash for repairs, you should get a receipt and signed by the handyman. Technically, you're supposed to issue them a 1099 if you pay them more than I think $600 per year.
@Nicole W. is right in her statement that you need to issue a 1099 to anyone you have paid more than $600 during the course of the year for services. The purpose of doing so is to cover your butt in case the IRS comes after you and your friend for tax fraud.
H&R Block is a great place to go, however you need to understand that they pull in temporary help for tax season and some of those people have no prior experience. The burden of accurately reporting your taxes ultimately falls on the taxpayer, so you need to analyze the risk of your own situation.
Speaking with a CPA or an accountant will help you understand exactly what you need to do to get organized. Being organized will save the CPA time, which in turn saves you money. I'd be happy to speak with you further, feel free to PM me.
@Brandon Hall makes a good point about how many of the big name tax preparation places use minimally trained, seasonal help. Not only are they less likely to be able to recognize and help you with the unique aspects of your situation, but they most likely won't have a real understanding of real estate investing. That means you could be missing out on things that a properly trained professional would catch.
As far as the organization thing, I would suggest trying to use categories (such as expenses for property #1, income from property #1, expenses from property #2, etc.) if you use the envelope idea that @Owen D. mentioned. Personally, I also make notes on my receipts so that I don't forget the purpose of a particular purchase, what property/deal it pertains to, or what it was that I actually bought if the receipt just has a code or abbreviation (e.g. ASRTD BNDRS).
I'm a public accountant- My best advise to you is find an awesome CPA and front the money to have them get you all set up. It's worth it.
I LOVE when our real estate related clients keep quickbooks- it will speed up the process for your CPA and save you money on your return.
Definitely keep all your receipts. Buy a cheap version of quickbooks. Find a good accountant.
Issue 1099's to any one you pay > $600 to...EXCEPT LAWYERS- ALWAYS send them a 1099. (if you have quickbooks- it tells you who needs them and you just stick a form in your printer and print them at year end- easy peesy)
Have a professional set up your chart of accounts in quickbooks and get everything going. Again- I promise you that paying the money up front saves headaches, audits, and money down the road.
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