My tax advisor says I am defining my business wrongly.
Rental Property Investor · Member since 2018 · 7 posts · 6 votes
My tax advisor says I am defining my business wrongly.
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Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes
6y"I called some CPAs in the past but they were quoting me $2000+ to do my taxes, that's why I stuck with the aunt for $300"
I wouldn't examine the cost, but rather the value you obtain. It sounds like you're learning the value you get from your $300 return preparer is commensurate with her cost...
25 Replies
- 6ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
My first question is what percentage of the use of those items is going to be for the rental property. Your business use should be prorated from personal so if you use it for both your day job and for the rental business then it's not 100% used for the rental business and not 100% deductible. Now what I am going to say is technically it is de minimus so you could technically deduct it but again the real question would be as to the use of personal use versus business.
Sorry for typos or run ons this was sent from my mobile phone.
is have a hard time justifying a computer for two to three rentals. So it depends is there real answer. I'd need more detail.
In the end I'd probably allow it as deminimis equipment.
- 6ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
Please know that rentals definitely can be considered a business activity.
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes6y
"I called some CPAs in the past but they were quoting me $2000+ to do my taxes, that's why I stuck with the aunt for $300"
I wouldn't examine the cost, but rather the value you obtain. It sounds like you're learning the value you get from your $300 return preparer is commensurate with her cost...
- 6ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
Originally posted by @Luis Baumeier:
I called my tax advisor to ask how to use my business credit card. She is my wife's aunt and is not a CPA, but has being preparing taxes for the whole family for years and for other people, including some LLCs. I was asking if we were going to be able to deduct the computer and printer I bought on that credit card, since I use for my business. I own 2 SFHs as rentals under the LLC. She told me we were not going to be able to deduct that because my business is not a real estate business, but only a rental business. Is she right? Should I look for a real CPA and do my taxes with them ?( I called some CPAs in the past but they were quoting me $2000+ to do my taxes, that's why I stuck with the aunt for $300)
What should I do?
Thanks
You get what you pay for. There are a lot of old timers that have no idea what they're doing. But there are some that stay up to date.
- Developer · Houston TX · Member since 2018 · 423 posts · 400 votes6y
@Luis Baumeier
On tax return you have a schedule E to show each rental income versus expenses. This is only for the property expenses and income. Schedule C is where you list your LLC as rental business and show all ur expenses .
But this is a better way so you can write off more.....
Create a DBA under your LLC. For example if your LLC is called Luis Holdings LLC u can go to ur local court house and get dba Luis Holdings LLC "doing business as" Luis Property Management Group.
Setup new bank account pay all expenses from their and collect rent into that account. This way u can expense things like mileage, materials etc as a property manager showing IRS ur actively involved.
I’m no CPA/Attorney but paid lot to them to learn a few things along the way.
- 6ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
Originally posted by @Luciano A.:
@Luis Baumeier
On tax return you have a schedule E to show each rental income versus expenses. This is only for the property expenses and income. Schedule C is where you list your LLC as rental business and show all ur expenses .
But this is a better way so you can write off more.....
Create a DBA under your LLC. For example if your LLC is called Luis Holdings LLC u can go to ur local court house and get dba Luis Holdings LLC "doing business as" Luis Property Management Group.
Setup new bank account pay all expenses from their and collect rent into that account. This way u can expense things like mileage, materials etc as a property manager showing IRS ur actively involved.
I’m no CPA/Attorney but paid lot to them to learn a few things along the way.
Please don't give tax advice you're not qualified to give. What you described are expenses that you can deduct any way as a landlord. If his income is over the 150k threshold the only difference is losses carry forward. He would need to pay himself as a PM in order to deduct the costs as if he was self employed. That could create SE tax and could cause him some significant issues in an audit.
What you described is a great way to get hit with substantial penalties.
- Member since 2019 · 42 posts · 16 votes6y
@Luis Baumeier
A CPA shouldn’t cost you that much. But I would definitely find one.
I sent you a link for a book which I think is the best one I’ve found for tax planning and strategy, written by a CPA and a lawyer.
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes6y
"On tax return you have a schedule E to show each rental income versus expenses. This is only for the property expenses and income. Schedule C is where you list your LLC as rental business and show all ur expenses ."
This is incorrect advice. Expenses associated with a rental real estate trade or business do not belong on Schedule C. The overhead and indirect expenses should be allocated among the properties on Schedule E. They should not be listed on Schedule C with no revenue and generally should not be non-passive and offsetting other sources of income, including W-2.
- Developer · Houston TX · Member since 2018 · 423 posts · 400 votes6y
Yes, you are correct. Sorry I did not mean to imply he should write the expenses on Schedule C in his current situation. I am assuming he currently is using only Schedule E to write down all his expenses to offset rental income, which limits his total loss after taking the depreciation and other normal expenses for a small rental etc. Given he has only two SFR, I dont think he would pass the professional investor test with IRS (750 hrs a year)so limited on total right offs. Unless his wife or partner is a stay at home person but that is outside this question. The phantom loss on paper is limited if it is on Schedule E for those trying to offset their W2 income. However, if Luis was going to write off things outside of repairs and wouldn't it be better to establish a DBA so that it can be treated as a business thus write-offs and losses can offset his income. And by having a property management collecting rents and writing checks to do repairs it gives him some privacy so he can act more like a property manager versus the owner. When he goes out driving around looking at potential rental purchases it would make more sense to have a business so it can be written off (mileage/food, internet, computer, and other expenses) if he is looking to grow rental portfolio but isn't buying an SFR monthly. Also, many small investors who self manage think that will save them money versus using a PM thus don't allocate an expense line for professional management. If he was to set up his own PM business can allocate 8-10% from each rental into this business thus business showing revenue. I am assuming expenses would be higher thus no real profit so wouldn't have to worry about Self Employment and SS taxes. Can use this business to show a loss for at least 2 years out of the 5 years.
- Rental Property Investor · Member since 2018 · 7 posts · 6 votes6y
@Steven Hamilton II Thanks for the explanation. That makes a lot of sense. I bought that computer on impulse , but should've consulted somebody first, my fault😂.
About the definition of my business, I thought I was a real estate/buy and hold/Deal search type of business, even though I was able to only buy 2 houses in the past 12 months, and that is what I use the computer for ( about 20 % of the computer use only), looking for deals, e-mailing realtors, contacting property managers, running numbers. The aunt told me "Well, your business is just rentals right now". I am Ok is she is right. I might have just misunderstood what my business is at the moment.
- Developer · Houston TX · Member since 2018 · 423 posts · 400 votes6y
I didn't join BP to try to sell or raising capital for my next deal. I wanted to be surrounded by other RE minded individuals that can talk shop and exchange ideas. I don't brag about my accomplishments nor have them listed here. However, as a person who got a Finance degree from Haas Business School at UC Berkeley and over $10m in real estate not including a couple of businesses I thought I would chime in with my thoughts on what he could do to help him. In my professional career, I have paid over $50k in CPA/Attorney billed hours.
Many small investors who self manage don't take under consideration that they might need to hire out a PM because they can't do it themselves anymore or don't want to do it at all. That lined expenses can hurt their bottom line thus they keep self-managing until one day they just give up and become a slum lord because they didn't realize the work it takes to manage a larger portfolio. I was implying if he were to set up a small business under a DBA or new LLC he would be able to write off a lot more. He could charge each rental 8-10% management fee thus his business generates income. I am assuming with only two rentals he would not show a profit thus wouldn't have to worry about SE taxes.
Setting up a separate LLC to manage the property would help him in the long run if he were to buy more units. Both in liability protection and taxes if done right.
I didn't assume he was making over $150k if he was currently writing off expenses on Schedule E and just passing the losses to the following year. However if he had a separate business to do management the losses on that can be used to offset his W2 for at least 2 out of 5 years. (This is what I have been told since I have not had a W2 since I was 17).
I might not have sat in on State CPA exam but this forum is for exchanging ideas and thoughts. Come at me showing my error in thought and I would be happy to admit when I am wrong.
I do see where I was wrong in explaining but cant change post. Having a PM business listed on Schedule C and expanding your rental portfolio can be a great tax benefit. Unless you're a licensed Real Estate Agent you can only manage your personal rentals or those with partners. Thus income would be little but tax benefits can be good versus writing off only on Schedule E.
- Accountant · Atlanta, GA · Member since 2015 · 1k+ posts · 1k+ votes6y
"However, if Luis was going to write off things outside of repairs and wouldn't it be better to establish a DBA so that it can be treated as a business thus write-offs and losses can offset his income."
Again, that won't work. Expenses associated with a RRE trade or business are "per se" passive under the passive activity loss rules. Merely changing the legal entity or legal structure for some expenses does not magically create a separate trade or business. Rental real estate trades or businesses expenses belong on Schedule E and are passive unless the taxpayer or spouse is an RE pro (as defined under IRC Sec 469 and related regs) and material participation (as defined in the 469 regs) is involved.
"When he goes out driving around looking at potential rental purchases it would make more sense to have a business so it can be written off (mileage/food, internet, computer, and other expenses) if he is looking to grow rental portfolio but isn't buying an SFR monthly."
As @Steven Hamilton II noted, all of those expenses can be written off on Schedule E for an RRE trade or business (with an eye toward the passive activity loss rules). Respectfully, I think you have received some inaccurate advice or have misinterpreted the advice...
- Developer · Houston TX · Member since 2018 · 423 posts · 400 votes6y
Thank you for your insight. Makes sense. SO ANYONE READING MY POST ON THIS SUBJECT ....DONT LISTEN TO ME. lol
I am always open to learning and being corrected. The only way to learn is from your mistakes.
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
@Luis Baumeier several experienced CPA have commented here, but I wanted add a couple points.
Owning rental property by itself does not necessarily rise to the level of business. You have to materially participate. She may be looking at the fact you use a property manager and concluding you are not managing your properties, therefore you don't materially participate. Deal finding alone may not rise to the level of business, not when you have just two properties that you have only owned less than a year.
Another factor could be when you purchased the computer and printer. If you purchased it before you owned any property, it cannot be claimed as a rental expense. If you purchased it after you owned the properties, it is hard to claim you used it for deal acquisition.
By your own admission, you are using the computer and printer 20% for business, which means if you did take the expense, it would be only 20% of that expense. That may be reasonable.
Bottom line is in the event of an audit you need to be able to defend the expense. At this point, not self managing and only having two deals less than a year, it is a little bit of a stretch to claim 100% of that computer. Some CPA may be comfortable with it, others more conservative. Despite what CPA like to believe, accounting is not black and white. Some CPA are more "creative" or "risky" than others.
As others mentioned, don't look at expense of a CPA but rather value. A good CPA can save you way more money than they cost. Heck, I will do your taxes for $200, want to hire me? (I am not a CPA and that was a joke.)
I would also recommend opening business credit cards under your LLC and use a business card for business purchases. It is not necessary, but keeps better separation of expenses.
- Multifamily Syndicator · Houston, TX · Member since 2016 · 1k+ posts · 2k+ votes6y
Simply said, you are always going to be better of getting a CPA. Trying to save here can be perceived as stepping over a dollar to get a dime.
Also, get the Tom Wheelwright's book Tax-Free Wealth. I'm sure you'll fire your wife's aunt after reading this book...
- 6ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
Originally posted by @Luciano A.:
Thank you for your insight. Makes sense. SO ANYONE READING MY POST ON THIS SUBJECT ....DONT LISTEN TO ME. lol
I am always open to learning and being corrected. The only way to learn is from your mistakes.
Wasn't trying to pick on you. We just combat SO much bad advice from hairdressers, lawn maintenance, sisters, cousins aunts uncles agents brokers etc. It becomes hard for many to determine what is correct.
- Rental Property Investor · Member since 2018 · 7 posts · 6 votes6y
@Joe Splitrock What you said clears a lot of things. Thank you. I understand better now. That's what I get for going on YouTube, typing "Real estate tax deductions" and thinking everything applies to my business and that I know everything now. To be honest all this CPA talk confuses me a lot, and the more I try to understand, the more It confuses me. I am just trying not to spend the little cash flow I get from my 2 rentals all on CPA fees and taxes. I know it sounds like I am being cheap, but after I got quoted $2000 for my yearly taxes I just though all the money I make with the rentals will go to pay the CPA, even if he saves me money on taxes. Am I wrong for thinking that? What do you guys think?
- Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes6y
@Luis Baumeier just because you spend $2000 doesn't mean you will get better advice than spending $300. However, you may spend $2000 and save $4000. I hope you get my point, which is that quality is more important than price.
I would recommend reading the Nolo book, Every Landlords Tax Deduction Guide. I also recommend the BP book, Tax Strategies for the Savvy Real Estate Investor. These books will educate you enough to have intelligent conversations with your CPA. Never put blind faith in any CPA or other professional. Always have some level of understanding and ask questions when you don't understand what they are saying.
https://store.nolo.com/products/every-landlords-tax-deduction-guide-dell.html
https://get.biggerpockets.com/taxbook/
Taxes are your largest expense that happens to return absolutely nothing, so it is the one area you want to spend considerable time trying to reduce tax expense. - Rental Property Investor · Member since 2018 · 7 posts · 6 votes6y
@Joe Splitrock
Got it. I will definitely read that book after I finish "the E-myth" that I'm reading right now. Thanks for all the advice everybody.
- 6ySteven Hamilton IIPro MemberAccountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
Originally posted by @Luciano A.:
Thank you for your insight. Makes sense. SO ANYONE READING MY POST ON THIS SUBJECT ....DONT LISTEN TO ME. lol
I am always open to learning and being corrected. The only way to learn is from your mistakes.
Wasn't trying to pick on you. We just combat SOO much bad advice from hairdressers, lawn maintenance, sisters, cousins aunts uncles agents brokers etc.
- 6yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
@Luis Baumeier
I have eight properties and do my own taxes myself on turbo tax. It’s really easy to do. Read a tax book to help your understanding on things a little and you’ll be set. I wouldn’t spend that kind of $ for a CPA for just two properties. It’s definitely not rocket science.
- 6yBrian BoydPro MemberUSA · Member since 2019 · 305 posts · 536 votes
First of all, I always advise people to put their team together with the following people: A CPA, a Book Keeper, a Banker, and a Lawyer. With these people you are paying for their value, which is exactly what you need to do to run a successful business.
Second, @Eamonn McElroy is exactly correct when it comes to value. Saving a penny here and there will cost you many dollars down the road. Get a CPA. There are plenty on BP and you should talk to some of them.
Third, you can deduct the equipment. I've defended enough audits and tax returns that I can confidently tell you that.
Best of Luck in your endeavors.
- 6yDominick AustriaBusiness MemberAccountant · Las Vegas · Member since 2019 · 51 posts · 21 votes
Originally posted by @Luis Baumeier:
I called my tax advisor to ask how to use my business credit card. She is my wife's aunt and is not a CPA, but has being preparing taxes for the whole family for years and for other people, including some LLCs. I was asking if we were going to be able to deduct the computer and printer I bought on that credit card, since I use for my business. I own 2 SFHs as rentals under the LLC. She told me we were not going to be able to deduct that because my business is not a real estate business, but only a rental business. Is she right? Should I look for a real CPA and do my taxes with them ?( I called some CPAs in the past but they were quoting me $2000+ to do my taxes, that's why I stuck with the aunt for $300)
What should I do?
Thanks
If most of the CPAs quoted you $2,000 it sounds like you may have a lot more going on then just 2 SFR. Do you have some other Schedule K-1s from a partnership or S Corp? Maybe a few brokerage accounts? Each year the IRS is pushing more and more onto tax preparers. For example, this last year you had to disclose your basis in a flow through entity on your tax return. A good CPA should be able to calculate and report this. But some preparers may not understand how basis works. Basis affects your gain once you sell. This is one of many examples of value added by a CPA.
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