The Joy of Being a Landlord 

Being a landlord can be a rewarding experience that provides passive income, tax benefits, and long-term wealth accumulation. However, it also requires time, effort, and grit to deal with the challenges and responsibilities that come with property ownership.  

One of the responsibilities (or joy?) of being a landlord is maintaining the property. You may need to remodel as part of the maintenance. Remodeling is an investment and can be costly, and you want to make sure you can maximize your tax deduction with your remodeling expenses.  

Can You Deduct Remodeling Expenses? 

Typically, you can deduct remodeling expenses for your rental property as a business expense on your tax return. Remodeling expenses are considered capital expenses, which generally cannot be deducted in full in the year they are incurred. Instead, they are typically depreciated over a period of several years. 

The amount and timing of the depreciation depend on several factors, including the type of property, the cost of the improvements, and the applicable depreciation method. In general, the cost of major renovations, such as adding a new roof or replacing a heating system, will be depreciated over a more extended period than more minor improvements, such as painting or installing new carpet. 

What Can You Deduct? 

As a landlord, you can deduct a wide range of remodeling expenses related to your rental property. Some of those items include: 

1. Materials and labor costs for repairs and improvements made to the rental property, such as fixing a leaky roof or upgrading the electrical system. 
2. Costs associated with upgrading or renovating the rental property, such as installing new appliances, cabinets, flooring, or fixtures. 
3. Fees paid to architects, engineers, or other professionals for design or planning services related to the remodeling project. 
4. Permit and inspection fees paid to local government agencies for remodeling work. 
5. Rent or other temporary housing expenses for tenants who must vacate the property during remodeling. 
6. Travel expenses related to the remodeling project, such as mileage, meals, and lodging, if you need to travel to the rental property to oversee the work. 
7. Depreciation of the cost of the improvements over the useful life of the property. 

It is essential to keep accurate records of all remodeling expenses, including invoices and receipts. You may also need to provide a description of the improvements made and when they were completed. 

Should You Hire Help? 

Tax rules for rental properties are complex and difficult to navigate, particularly when it comes to depreciation, capital gains, and passive activity rules. It is recommended that you consult with a tax professional, as they can help ensure that you comply with applicable tax laws and regulations, maximize your deductions, and minimize your tax liability. In addition, your tax consultant can also help you plan for the future by providing advice on tax planning strategies, such as the use of tax-advantaged retirement accounts or the timing of property sales. Your tax consultant can be a valuable partner for providing you, the landlord,  guidance, expertise, and peace of mind when it comes to tax compliance and planning. 

Ordinary Income 

The term “ordinary income” can be confusing, as it might suggest that the income is common or normal. However, in the context of tax law, it has a specific meaning. It refers to income earned through the normal course of business operations or from other sources that are not considered investments. Ordinary income includes wages or salaries earned from employment, income from a business, commissions earned from sales, and fees earned for professional services. This income is subject to federal and state income taxes, as well as other taxes such as Social Security and Medicare taxes.

The term “ordinary income” is used to distinguish this type of income from other types of income that may be taxed differently, such as capital gains or passive income. For example, capital gains are generally taxed at a lower rate than ordinary income, and passive income may be subject to different tax rules and limitations. 

Passive Income 

Passive income is earned from sources where the taxpayer is not materially participating in the activity that generates income. This can include rental income, interest income, dividend income, and certain types of capital gains. Passive income is typically generated from investments or rental properties rather than from active business operations. The taxpayer may have some involvement in the investment or property, but they are not considered to be actively engaged in the day-to-day management or operations.

Passive income is generally subject to different tax rules than ordinary income. For example, passive income may be subject to a lower tax rate, and losses from passive income activities can only offset other passive income rather than ordinary income. 

Ordinary vs. Passive Income Tax Reporting 

When it comes to tax reporting (Americans’ favorite pastime), ordinary income and passive income are being treated differently. Ordinary income is generally subject to self-employment tax and is reported on Schedule C of the individual’s tax return. Passive income is typically reported on Schedule E of the tax return. In addition, losses generated from ordinary income activities can offset other ordinary income, such as salaries or wages, up to a certain limit, which can help to reduce the amount of taxable income. However, losses from passive income activities can only offset other passive income and cannot be used to reduce taxable income from other sources.  

For example, suppose you have a net loss of $5,000 from your rental property (which generates passive income) and a net profit of $10,000 from your consulting business (which generates ordinary income). In that case, the $5,000 loss from the rental property can only be used to offset other passive income and cannot be used to reduce the taxable income from the consulting business. There are also certain limitations on the amount of passive losses that can be used to offset passive income. For example, suppose you have $10,000 passive income from a rental property and $15,000 passive losses from another. In that case, you may only be able to use $10,000 of the losses to offset the passive income, and the remaining $5,000 of losses may be carried toward future tax years. 

It is essential to understand the difference between ordinary and passive income and the rules regarding loss offset when reporting income and losses for tax purposes. The IRS isn’t a very forgiving organization when it comes to making mistakes. The Accuracy-Related Penalty is 20% of the portion of the underpayment of tax. Not to mention the interest on the penalty! So save yourself from the heart and headache of making tax mistakes by consulting with a tax professional. In addition, your tax consultant may be able to maximize your tax benefits.  

The What 

As a business owner, you probably are familiar with these two words: budgeting and forecasting. But what do they mean? Budgeting involves creating a detailed plan for income and expenses over a specific period, such as a month, quarter, or year. A budget typically includes projected revenue, costs, and expenses, broken down into specific categories such as salaries, rent, utilities, and supplies. 

Forecasting involves predicting future business performance, such as revenue growth, market trends, and cash flow. A forecast can be based on historical data, current trends, or both. Generally speaking, there are two responses from business owners regarding the matter of budgeting and forecasting: 

1. Those who see it as an essential part of their business planning and decision-making process, or 

2. Those who find it a tedious and time-consuming task (if you are in this category and do not have a qualified in-house accountant, it is highly recommended to consider hiring an outsourced staff accountant, for reasons we will mention later). 

Regardless of your feelings about this task, budgeting, and forecasting are crucial tools for managing finances, planning for the future, and making informed decisions. 

The Who 

In small businesses, the responsibility of budgeting and forecasting may fall on the owner or manager, who may need to work with an accountant or financial advisor. The reality is that most small business owners have little to no training in bookkeeping. Hence, taking on the responsibility of budgeting and forecasting seems daunting, and hiring a full-time in-house accountant may be out of the budget, so they often put it off and just hope for the best. This leads to discovering problems when it is too late. 

According to BLS data, nearly 20% of businesses fail within the first year, and by year five, the failure rate has increased to almost 50%. And according to a study by Jessie Hagen of the U.S. Bank, 82% of businesses fail due to poor cash flow management. And guess what? Budgeting and forecasting are key to managing cash flow. 

The Why 

Budgeting and forecasting are critical for small businesses for several reasons: 

1. Planning for the future: Budgeting and forecasting allow you, the business owner, to plan for the future by projecting revenue, expenses, and cash flow. This is essential in making informed investment decisions, hiring, and other strategic initiatives. 

2. Managing cash flow: You can avoid cash shortages by creating a budget and forecasting future expenses and revenue. 

3. Identifying potential problems: Budgeting and forecasting can help small businesses identify problems before they occur. You can identify areas of overspending or under performing and take corrective action before it is too late. 

4. Tracking progress: Creating a budget and forecast allows you to track your company’s progress over time. You can see how your company performs against the projections and adjust as needed. 

5. Securing financing: Securing financing is getting harder and harder during a financial downturn, and many lenders and investors are tightening the requirements. Having a solid budget and forecasting plan in place can increase your chances of securing financing. 

But What If I Don’t Have An Accountant 

By now, we can all agree that budgeting and forecasting are essential to the survival of all businesses. You are on board but overwhelmed. You are unsure where to begin, and hiring a full-time in-house accountant or having a full-blown accounting department may not be in your best interest right now. The perfect solution is to hire an outsourced staff accountant. The outsourced staff accountant is becoming more popular, particularly in small and medium-sized enterprises, due to the variety of services provided and the cost-savings. 

So, don’t put it off any longer; it is time to tackle this task head-on and take your business to the next level. 

When the economy takes a downturn, or when the market is volatile, a person looking to start a business may think that all hope is lost for their idea. At least until the economy starts to pick back up again. However, economic hardship has proven to be a great time to start a new small business. Other businesses are looking for ways to revise their budgets and develop new business plans to accommodate the changes in the economy. You can start your new business a step ahead with some recession savvy tools and tricks. Learn how to make the most of an economic downturn and get your new small business started on the path to success.  

1.  New Market

When the economy is trending downward, new problems arise. Your small business could rise to solve these new problems. Start brainstorming business ideas by determining where your customers’ pain points are. If you already have a business idea in mind, determine where your business fits into the customer’s needs. Even if these problems are coming to the forefront during an economic downturn, they may not be entirely new problems. Understand how customers were addressing the problems before. Learn who currently provides the best solution to the problem. Define why your business is better and why customers should switch to yours. Many customers are looking to make a switch during a downturn to cut costs or gain a more efficient solution.  

2. Lower Expenses

During hard economic times, other businesses are most likely selling off equipment, assets and supplies and much lower costs. Some businesses may be closing or transitioning to a remote model and selling their office furniture at a lower price. Other businesses are offering deals and discounts in an effort to sign new customers. Take advantage of these deals as you establish your business.  

3. Access to Funding for Small Businesses

Many times, the government releases funding packages to help stimulate the economy during a downturn. These packages are often available to small businesses, including ones that are just starting out. This may also include provisions for tax credits and incentives for businesses filling a niche left in the market by the trend in the economy. Another perk of starting a business during tough economic times is bank rates. There’s a good chance that banks are changing their rates to accommodate the economy and encourage spending. This means lower interest rates for a new business account. There is also a higher chance of getting approved for a higher credit limit than you usually would. Typically, they also reduce the penalty for late payments for lines of credit and loans. Investors are also usually still looking to invest in startups and small businesses, especially ones touting products that are higher in demand during the economic crisis. Startups are inherently risky, of course, but these investors are looking to move their capital from the stock market. Startups are their safest bet, providing them with more security and you with funds for your business.

Small business owners face a multitude of challenges every day, from taking care of the customer end of things to ensuring their products or services are the strongest they can be. When it comes to the financial side of business, it can be overwhelming at times to maintain cash flow. Competitors, inventory issues, and economic changes all have an effect on small businesses.

Fortunately, there are some simple ways to cut back on expenses and grow your income. You might start by acquiring the services of a consulting firm like NOW CFO that can help you with everything from funding strategies to working out a budget. Then, think about how you can make financial decisions and transactions as easy as possible.

1. Find the right bank account

These days, there are a wide variety of bank accounts for both personal and professional needs, and they all have different features. Do a little research to find an account that will help you effectively stay on top of your finances.

Look to open an account that links with your payroll software, providing a streamlined and efficient way to pay your employees. The best business bank account will also have benefits like free instant deposit, high-yield interest, and an easy-to-use mobile app which allows you to handle your banking needs right from your smartphone. Having access to so many features will take the guesswork out of banking and give you some peace of mind when it comes to your business’s finances.

2. Cut expenses

Once your banking is squared away, it’s time to look at your budget and expenses. Most small businesses have a number of small expenses that really add up over the course of a year. The good news is, many of these can either be consolidated or eliminated, including monthly fees for software access, subscriptions to streaming services, or payment systems and credit card companies.

The best way to get started is to look for similar services that are free or discounted instead. Google offers a ton of free services and products, from email to spreadsheet and word processing platforms. Contact your preferred credit card companies to find out if they have a small business account that would benefit you, or consider changing your payment system to one that offers simple services in exchange for a lower monthly fee.

Keep in mind that you also have the option to deduct several expenses throughout the year, so it will be crucial to keep detailed records for tax time.

3. Branch out

After cutting back, it’s a good idea to look for new income opportunities. There are many ways you can market your business without adding stress or hours to your day, such as adding to your social media presence, creating engaging video content to share with customers, teaming up with other local businesses for promotions and events, and utilizing online advertising. Get creative and plan a strategy for different times of the year. For instance, if you own a floral business, look for ways to get your name out to high schools during prom season.

4. Stay on top of your invoices.

If you don’t have a great organizational system, you may be losing money. Cutting back on expenses and looking for new opportunities are both examples of preemptive measures, but your invoice and billing system should be well maintained every day. Take a look at the amount of time it takes to recover payment after an invoice goes out — a process that NOW CFO can help with — and consider changing things up for extra-large orders. For instance, you might require a deposit for orders over a certain amount to protect yourself.

Cashflow can be unpredictable for small businesses, but with the right moves, you can keep your finances in good shape and prevent setbacks. Utilizing professional services will ensure smooth transitions as you make changes and will help you reduce stress throughout the process.

Happy wife, happy life? More like happy accountant, healthy business.   When it comes to running a business, your accountant can be one of your greatest allies. With a strong accountant to client relationship comes healthy business finances and a business that thrives. Use these five simple tips to maintain a strong relationship with your accountant. When it comes to

Maintain Records

Many businesses utilize a cloud based accounting system to maintain the records of their company. This does make it easier to compile financial data into reports and may even aid the tax filing process. However, while software does make day to day operations in your business easier, it may ultimately make things more difficult for your accountant. To combat this, maintain copies of things like receipts and invoices for major transactions either digitally or physically. That way your accountant has all the information they need to keep your business running smoothly, even in the event of an issue or an audit.  

Stay Organized

Those records are most useful to your accountant if they are well-organized. Not only will that make their job easier, it will also save your business time and money in the long run. Many types of software allow for digital scans of receipts that will be organized according to your existing method. If your company’s software doesn’t allow that, consider a filing method that arranges your documentation by type or date. This way, your accountant can easily pull the files they need when they need them.  

Transparency

Maintaining a policy of complete openness and honestly with your accountant is crucial to your working relationship. Hiding things from your accountant can result in aspects of your business’ health being overlooked. Dishonesty about things like income and taxes can result in legal implications for both you and your accountant. In order to have a relationship with your accountant that makes your business the best it can be, maintain total transparency with your accountant.

Communication

A great accountant doesn’t just work with the numbers, they also take a holistic approach to improving every aspect of your business. This includes advice on business issues, strategies for big decisions and more. Your accountant brings a lot more value to your company than just great financial reporting, and the best way to get this information is to communicate openly with your accountant. Let them know when anything in your finances or overall business changes in real time. Don’t wait until tax season or an emergency.  

Ask Questions

Remember that your accountant is there for you and your business. Don’t be afraid to ask them questions. Call your accountant or shoot them an email when something comes up that you would like to ask them about. Running a business can be difficult, and so can maintaining the finances of that business. Often, your questions can help your accountant spot problem areas in your business before they become a bigger issue. Your accountant is happy to help your business thrive.

When the economy takes a downturn, or when the market is volatile, a person looking to start a business may think that all hope is lost for their idea. At least until the economy starts to pick back up again. However, economic hardship has proven to be a great time to start a new small business. Other businesses are looking for ways to revise their budgets and develop new business plans to accommodate the changes in the economy. You can start your new business a step ahead with some recession savvy tools and tricks. Learn how to make the most of an economic downturn and get your new small business started on the path to success.  

1.  New Market

When the economy is trending downward, new problems arise. Your small business could rise to solve these new problems. Start brainstorming business ideas by determining where your customers’ pain points are. If you already have a business idea in mind, determine where your business fits into the customer’s needs. Even if these problems are coming to the forefront during an economic downturn, they may not be entirely new problems. Understand how customers were addressing the problems before. Learn who currently provides the best solution to the problem. Define why your business is better and why customers should switch to yours. Many customers are looking to make a switch during a downturn to cut costs or gain a more efficient solution.  

2. Lower Expenses

During hard economic times, other businesses are most likely selling off equipment, assets and supplies and much lower costs. Some businesses may be closing or transitioning to a remote model and selling their office furniture at a lower price. Other businesses are offering deals and discounts in an effort to sign new customers. Take advantage of these deals as you establish your business.  

3. Access to Funding for Small Businesses

Many times, the government releases funding packages to help stimulate the economy during a downturn. These packages are often available to small businesses, including ones that are just starting out. This may also include provisions for tax credits and incentives for businesses filling a niche left in the market by the trend in the economy. Another perk of starting a business during tough economic times is bank rates. There’s a good chance that banks are changing their rates to accommodate the economy and encourage spending. This means lower interest rates for a new business account. There is also a higher chance of getting approved for a higher credit limit than you usually would. Typically, they also reduce the penalty for late payments for lines of credit and loans. Investors are also usually still looking to invest in startups and small businesses, especially ones touting products that are higher in demand during the economic crisis. Startups are inherently risky, of course, but these investors are looking to move their capital from the stock market. Startups are their safest bet, providing them with more security and you with funds for your business.