QuickBooks and Security Deposit

8 Replies

I am looking for some guidance on managing security deposits, repairs, and return of the balance from a bookkeeping standpoint.  This is the first time I am going through this and I want to make sure I am handling it correctly in QB (I use Desktop Pro 2018).

The security deposit was held as "Other Current Liability" for the the sake of this discussion was $1000.

Tenant moves out - some minor repairs are needed that are charged back to the tenant in the amount of $200

I pay my handyman $1500 to turn the apartment, which includes repairing the tenant damage

So here is my confusion - I pay the tenant the remainder of the SecDep of $800 from the Security Deposit account.  Do I allocate the $200 remaining to the operating account and then becomes income?  Or do I spit the repairs (or ask for 2 invoices) and pay the $200 directly from the SecDep account to cover the repairs and keep the remaining $1300 in repairs and maintenance?  Come tax time, I assume either way I can only deduct the $1300 and not the full $1500.  

Again, this is my first go at this and I want to make sure I am doing right now to prevent issues later.  Thanks in advance.

Pay the $200 by charging it to the Security Deposit liability account and charge the remainder of the make ready to repairs and maintenance expense for that unit.

Bryan 

When a tenant does damages and you pay a handyman or anyone to do the repairs and intend to make the tenant pay you back, it is never considered INCOME.  It is a REIMBURSABLE BILLING and is done on the bill or check that you type up in QuickBooks through the Vendor Center from the bill you received from your handyman. 

The reason you do this as a REIMBURSABLE BILLING is due to the fact that it is not INCOME.  You don't want to be put into a higher tax bracket at the end of the year due to you entering in this payment as Income when you really didn't make that money.  You paid for the repair and the tenant paid you back.  It is a wash.  

If the tenant never pays you back then the repair becomes a normal expense account, and of course, you don't have any money because they never paid you so in this case you wouldn't have to worry about you being thrown into a higher tax bracket. 

Once again it must be done as a REIMBURSABLE BILLING.  You would do this for NSF Fees due to tenant's bouncing a check and the bank charging you a bounced check fee.  You bill the tenant and they pay you back.  That money is not considered income.  

We never want to say we made more income then we actually did.  Who wants to pay more taxes at the end of the year when we never received this money as income. We paid it first, they paid us back.   

It would take too long to tell you in great detail how to do this and I apologize for that. 

Also, Victor is correct  as to how to deduct it, but there is more to it than that as well. 

Nancy Neville

Bryan,
Great question see attached guidance from IRS website. Scroll down to the article about security deposits.
https://www.irs.gov/taxtopics/tc414

Essentially if you deduct the cost of the repairs that were paid out of a security deposit then you should claim it as income however if you don’t deduct (like you mentioned that you weren’t planning on doing than you shouldn’t count it as income). I hope this helps.

Thank you all.  @Account Closed , I appreciate the detailed response and will charge that as reimbursable billing.  That makes sense and if the situation happens where the charge back is larger than the security deposit and I don't get paid by the former tenant, that is easily tracked for a year end write off.  

@Bryan Petrinec  Simple way, book the full payment to your handyman of $1500 to Repair expense. Then, the payment for the return of $800, enter it as split (2 lines), one line to Security Deposit of $1000 and the second line as -$200 (yes, negative amount) to Repair Expense. You can be more specific on the description on each line item for future reference. 

Proper way (but more complicated), enter the handyman check of $1500 as split (2 lines), $1300 as repair expense (non-billable) and $200 as repair expense (billable). Then you will need to create an invoice in the customer account for the $200 billable expense. Then create a credit memo for the security deposit for $1000. Apply $200 of the credit memo to the billable expense invoice, then issue a refund check for the remaining $800 credit. 

If you are not properly tracking customer transaction (creating invoice or sales receipt) anyway, then I would just go the simple way. 

God speed, Bryan! I tried to do my books with QuickBooks and it made my head hurt. I had it all messed up. I found a book keeper that enters it all for me and then explains it. She charges me $25 a month to enter in the property and sends me what I need at tax time. For me it’s a great investment. But it’s a skill I don’t have nor do I have the time to learn. I’m always in awe of people that can just pick it up. It seems like there are so many ways to do it wrong.

@Bryan Petrinec

This is all the journal entries that you are required to make

To record receipt of security deposit
Cash(restricted or Security Deposit)  $1000
         Security Deposit                                        $1000

To Record Repairs
Repairs Expense                                      $1500
           Cash                                                           $1500

To change restricted cash to unrestricted
un-restricted Cash                                $1000
         restricted Cash                                            $1000

To record Return of Security Deposit
Security Deposit(liability)                         $1000
           Rental Income                                         $200
            Cash                                                         $800

After everything is said and done - you shouldn't have an asset or liability account related to security deposit. You have $1500 of expenses and $200 of income.