As a Landlord, you may incur certain expenses during the course of business that have some significant impact on your profitability. Among these are supplies, taxes, and utilities, which are generated from the property from which you are receiving income. As with other business expenses, you must remove any personal use items as well as determine any periods of time in which the property was used for personal reasons. This is the case even if you are using 1040 Schedule C or Schedule E. Let’s start with supplies.
- For further information please review IRS Publication 527.
These expense can be very tricky and sometimes difficult to maintain, however if set up properly then there should be very few problems at tax time.
Let’s determine what items would fall into this category. Most items in this account are using day to day consumable goods purchased solely to maintain the rental place. First let’s look at the difference between “supplies” and “expenses.” Expenses are usually items that are used when consumed. An example would be a trash can, certain small appliances, food, etc. Supplies are items that you would purchase sometimes in bulk for the same purpose; however, these items can be held in inventory storage until consumed. Examples of this are bulk paper (copy, toilet, etc.), pens, pencils, bulk cleaning items, trash bags, etc. It is very important to note that these items should be inventoried periodically to monitor costs as well as quantities on hand. Postage stamps are another item which you may buy in bulk, but only use a fraction leaving the rest in inventory until used. Keeping a supplies and expenses chart of accounts is the best way to handle this.
- Read this article for more information on the Mileage Method.
During the course of business there are many taxes that you might have to pay directly related to the property. As with most jurisdictions, you may receive a separate bill for your property, business, and income taxes. If you operated a rental property in which this is not the case, then as we mentioned earlier you must allocate the percentage of personal use to business use. This is common with a house in which a homeowner may have “residents” living in empty bedrooms and other spaces. This is a very important area since a miscalculation can cause large interest and penalties when discovered after a tax audit review. It is recommended that on each tax bill make a copy of the original bill and on the copy write down the calculated amounts as back up for your records. This can be somewhat complicated if you are using a Schedule E and have multiple properties and you receive a tax bill with no separation of address. Real Estate taxes are deducted as applicable to the property assessed and should not include the owner’s basis.
This is somewhat the same as with taxes since most utilities such as electricity, water, gas, communications, and security may be paid by the landlord on a single bill. If you have multiple properties, sometimes separate bills are issued. However, if there is any personal use, you must allocate the portions which are business from the personal and report them on the appropriate tax schedules.
Shoreline CPA+John Huddleston has written extensively on tax issues for small business owners. Since 2002, he has owned his own small business, Huddleston Tax CPAs. He holds a law degree and a masters in tax law, both from the University of Washington School of Law.