Recordkeeping for your Rental Property or Small Business

Recordkeeping for your TaxesSo you’ve purchased a property to rent out, or you’ve started a small business. You’ve heard that the tax code allows for generous deductions—but how do you go about claiming them? And how do you stay out of trouble with the IRS?

The first thing that a new business owner or real estate investor should do is to treat your new venture like a “for profit” business and not a hobby.  Appearances are important!  If possible, open a separate bank account and/or use a separate credit card.  If it makes sense, you may want to incorporate or form an LLC.  For a business, you should have a basic business plan and a marketing plan.  If you use a vehicle, you should keep a mileage log.

But what I’d really like to focus on here is general recordkeeping.  All too often, I see that business or rental expenses have been paid out of personal funds, with no attempt at all to separate them until tax time.  Not only does this create a huge backlog of transactions to review at year end, but it also prevents you from seeing how your business or real estate rental is performing on an ongoing basis.  To keep things under control, I highly recommend using either or .  With either program, you can download transactions directly from your bank and categorize them as you go.  This is really important since generally our memories fade with time. (At least mine sure does!)  If your tax return is on extension and you sit down in October to categorize transactions that occurred early in the PREVIOUS tax year, it is going to be very difficult to say the least.

If you have only one or two rental properties, or a small service business, may be perfectly adequate for your needs.  It is especially appropriate if you use the same bank accounts and/or credit cards for your  business or rental as you do for personal use.

If your venture is set up as a separate entity, or if you are not, for the most part, mixing business/rental and personal expenses, then you may want to use .  This software can handle more complicated situations and lets you do true double-entry accounting.

Besides tracking your expenses with financial software, you’ll want to make sure that you have a system in place to save receipts for all of your deductible expenditures.  This can be either a paper or electronic based system, or both.  In the event of an audit, your self-maintained bookkeeping system may not be enough and you may be asked for the actual receipts or invoices generated by 3rd party vendors.

Getting your recordkeeping in order for your small business or rental properties may not be the most glamorous task, but once you get a system in place and get caught up, it won’t take that much time to maintain.  Imagine how great it will be at tax time next year when you can simply run a Quicken or QuickBooks report to generate all the information needed to file your returns.  Eliminate those tax time headaches by taking the time to get your records up to date now!

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Note:  This post was first published on October 25, 2012 but has now been updated.


photo by: 401(K) 2012