Rental Real Estate Tax Tips – Income, Deductions and Recordkeeping

As a rental real estate owner, it’s important to be aware of your federal tax obligations. Knowing this information up front will prevent you from getting into a problematic situation. The first thing to understand is the method of reporting you use will depend on whether you’re a cash basis or accrual method taxpayer. The next important topic is knowing the exact classification of rental income.

The IRS states that “generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of the property. You must report rental income for all your properties.” They also explain that other forms of payment may need to be reported on your tax return, including advance rent, payments for canceling a lease and security deposits that you end up keeping.


More Types of Rental Income (Plus Tips on Deductions)

Another area that can get confusing is expenses paid by a tenant. As the IRS explains, “expenses paid by tenant occur if your tenant pays any of your expenses. You must include them in your rental income. You can deduct the expenses if they are deductible rental expenses.” Other income areas to be aware of include property or services received lease with option to buy and part interests in rental properties.


Now that we’ve covered all the different types of income that the IRS expects rental real estate owners to report, you’re probably wondering what kind of deductions are available. Deductible expenses can include mortgage interest, property tax, operating expenses, depreciation, and repairs. The IRS allows you to deduct the ordinary and necessary expenses for managing, conserving and maintaining your rental property. Interest, taxes, advertising, utilities, certain supplies, and maintenance are all examples of deductions that rental real estate owners can generally make.


One deduction that’s not allowed is the cost of improvements. The IRS makes it clear that a “rental property is improved only if the amounts paid are for a betterment or restoration or adaptation to a new or different use.” However, it can be possible to recover some or all of your improvements by using Form 4562 to report depreciation beginning in the year your rental property is first placed in service, and beginning in any year you make an improvement or add furnishings.


As you can see from both the income and deductions side, there’s a lot that goes into staying on track with your tax obligations as a rental real estate owner. These obligations are why it’s vital to keep good records. The IRS makes it clear that you “must be able to document all information if your return is selected for audit. If you are audited and cannot provide evidence to support items reported on your tax returns, you may be subject to additional taxes and penalties.”


If you have any other tax questions related to rental real estate, you can easily get a free consultation with Donohoo Accounting Services by calling 513-528-3982.

Adjusting Your Withholding If You Receive a Large Refund

Although the experience of getting a large tax refund can be quite nice, many people don’t realize that it’s not optimal. The reason is receiving a large annual refund means someone is actually missing out on a larger total amount of money.

The simple explanation of why that’s the case is if you consistently receive a large refund, it means too much of what you make is being held out of your pay. So even though people often find getting a large refund convenient because they’re able to put it towards a large purchase or paying off a specific debt, it’s important to remember that this money belongs to that individual. By letting the IRS hold it for most of the year, people are turning over the opportunity to earn any interest from it.


The Why and How of Adjusting Your Withholding

A simple exercise for seeing the impact that adjusting your withholding can have on your monthly income is to take your most recent tax refund and divide it by twelve. That figure will give you a general estimate of what you could add to your monthly take-home pay. While you do eventually get the total amount back in the form of a refund, receiving it over the course of a year provides the opportunity to invest or at the very least earn a little interest from a savings account.

If you decide that it makes sense for you to adjust your tax withholding, you may have an opportunity if your employer asks about this issue in December or January. But even if they don’t, you can make a change at any time by filling out a new W-4 and then handing it in. The rule of thumb for anyone who consistently receives a big refund is to increase the number of personal allowances. And if you want to make this adjustment because you consistently end up owing taxes, decreasing personal allowances is generally the best way to go.

Since finding the right balance can be a little tricky, you may want to use a withholding calculator to help you out. It’s also worth noting that other times to review your current withholding are when you or your spouse get more than one job. The same is true if you have children, get divorced, buy a home or get married.

Knowing if you need to adjust your withholding is just one example of the type of issue that can directly affect your finances. If you want to be sure that your tax situation is fully optimized, be sure to take a look at our tax return preparation service.


New Federal Tax Law May Affect Some Refunds Filed in Early 2017

Last year, the IRS announced plans that may affect how some tax returns are processed during the start of 2017. Since this announcement may impact how your return is processed in the very near future, we want to cover all the relevant information you need to know.

The tax returns in question are those that involve the Additional Child Tax Credit and Earned Income Tax Credit. The reason that some early filers may be affected by this change has to do with the PATH Act. Protecting Americans from Tax Hikes Act of 2015 went into effect on December 18th of 2015. The purpose of this act is to help taxpayers and their families.

One of the changes the PATH Act put into place was a new law which mandates that no credit or refund for an overpayment for a taxable year shall be made to a taxpayer before February 15th if the taxpayer claims the Additional Child Tax Credit or Earned Income Tax Credit on their return.


What These Changes Mean for You

If you’re not claiming either of these credits, this specific change won’t have an impact on your filing or any refunds you receive. However, this law does demonstrate the frequently changing nature of the US tax code, which is why it’s always helpful to have a knowledgeable tax professional on your side.

For anyone who did claim either credit and filed their return, you should be aware of a few additional details. First, the IRS will hold refunds related to the ACTC and EITC until the 15th of February. This is being done to comply with the new federal law. The purpose of this additional time is to help prevent revenue lost due to identity theft and refund fraud related to fabricated wages and withholdings.

One question that has come up about this issue is whether or not the IRS will hold an entire refund. The answer to that question is they will. As the IRS explained in one of their official releases on this topic, the new law does not allow them to release part of the refund despite not being related to the ACTC or EITC.

Another topic worth clarifying is this shouldn’t cause anyone to change their filing schedule. The IRS will start accepting returns on January 23rd (you can submit your returns to a tax professional before this date and then they will send it in as soon as the IRS window opens). And the IRS has also made it clear that they still expect to issue the majority of refunds in under 21 days.

If you have any other questions about this issue or other topics related to your tax filing, Donohoo Accounting Services is here to help. You can get a free consultation about our tax services by calling 513-528-3982.


Why Do Some LLCs Opt for S Corp Taxation?

A limited liability company is a legal entity that’s formed under state law. A big part of why many businesses opt for this structure is while it offers many of the advantages of a corporation, it’s both easier to form an LLC and operate it.

When an entity like an LLC is formed, it receives a default form of tax treatment. For LLCs owned by more than one person, that default is taxation as a partnership. If an LLC only has one owner, its default form of tax treatment is as a sole proprietorship.

While many businesses opt to keep their form of default tax treatment, it’s worth knowing that other options are available. Specifically, an LLC can choose to switch their tax treatment to a C or S corporation. Making this switch is much easier than many business owners expect.

Understanding S Corporation Taxation

In the eyes of the IRS, an LLC that has elected to be taxed as a C or S Corporation is that entity. So when it comes to deciding whether or not your business should elect for this type of taxation, it’s important to understand the full scope of implications.

Partnerships are considered pass-through entities. What that means is both income and losses are passed through the partnership to the personal tax returns of the owners. S Corporations are also pass-through entities. The forms filed by S Corporations include an information return via Form 1120S and then shareholders file a Schedule E with their Form 1040.

One of the key factors that separates partnership tax treatment from an S Corporation is the owners’ employment status. With a standard LLC partnership, owners are not viewed as employees and taxed accordingly. But with an S Corporation, owners who perform more than minor services for the corporation will be both employees and owners for tax purposes.

With this type of treatment, an owner needs to be compensated with a reasonable salary. Then the owner reports this salary and pays the relevant share of Social Security and Medicare taxes. The S Corporation is also responsible for withholding all applicable taxes.

Although that may sound more complicated and potentially less advantageous, the potential benefit of being treated as an S Corporation comes from not having to pay employment tax on distributions. For businesses with significant distributions, this provides a way to save a meaningful amount on both Social Security and Medicare taxes.

Donohoo Accounting Services has 20 years experience in helping clients resolve their tax and financial issues. If you have additional questions about which tax treatment is best for your business, you can get the answers you need by working with us. Call our office now for a free consultation at 513-528-3982.