#21: - Head Start on 2024: Preparing as a 1065 or 1120S Filer Without Books

Real Estate Is Taxing

Anyone with a 1065 Partnership or 1120-S S-Corporation should have bookkeeping in my opinion, but if you don't...this episode is for you. This is your head-start on getting everything together for your tax professional to file your 2024 business tax return.

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Introduction

[00:00:00] Welcome to Real Estate is Taxing, where we talk about all things real estate tax, and break down complex concepts into understandable, entertaining tax topics. My name is Natalie Kolodij, I'm your host, and I am so excited that you've decided to join me.

[00:00:23] Hello. Hello everyone. We have just made it past the first fall extension deadline. Any 10 65 partnerships or 1120-S S corporations were due on September 16th this year. So we've just passed that hurdle. And part of what I realized this year is that there are a lot of people who don't know they've created an entity.

[00:00:49] They're not aware that they have a partnership. I've talked about this before. Or there are people who create the entity, they create a partnership or they create an S corporation, but they don't really know. Or their tax professional didn't give them a good rundown on what the differences are, what is required for filing, and what will be different because you now have this entity.

[00:01:12] So if you are someone who has a partnership or an S corporation, and you do not have formal bookkeeping, you don't have full QuickBooks, you don't have a bookkeeper, then this episode is for you. So I will note if you are using Tessa for your rental properties and you have a partnership, this is not formal bookkeeping.

[00:01:33] It's not a true bookkeeping system or a true double-entry platform. So while Tessa is great for keeping track of a profit and loss, and just keeping track of your income and your expenses for a property, once you move into a separate tax return, once you move into a 10 65 partnership filing, there's more information we need to keep track of, and it doesn't do this very well.

Preparing for 2024 Tax Year

[00:01:57] For today's show, I'm going to talk through some of the differences, like why we need more information for these returns and what information you should start gathering now to help prepare for the upcoming filing for the 2024 tax year.

[00:02:18] So I'm trying to give you a little bit of a head start. It's quarter four, so you have time to either find and hire a good bookkeeper to help you get books before the end of the year or start gathering all of the information I'm going to talk about so that you have a jump on all of the information your accountant is going to need. If you go to a tax professional and they're not asking for all of this information, while they might technically be doing your tax return, they're doing it in the most surface level numbers on forms way possible.

[00:03:00] What kind of talk about that a little bit more. But I recently had a new client who went to a large well-known tax and attorney firm. And last year for their entity return, where they didn't have full books, they just had the client complete an organizer.

[00:03:09] So they just used whatever information he told them—whatever amounts for bank account balances, etc. They did not ask for any of the actual documents to check any of this. And if that's the case, there's close to a 0% chance your return is accurate.

Costs of Entity Creation

[00:03:27] So let's dive into it. Let's start off with what happens when you create a partnership or an S-corporation.

[00:03:35] The first thing that I want people to consider when they are creating a partnership or creating an S corporation is that this creates a whole new, additional tax return. So there's a whole separate filing. Even though something might not have changed with your business last year, you might've had two rentals and they were on your personal return, and this year you have two rentals and now they're in a partnership, there's a whole additional filing.

[00:04:05] Entities require more information. There's more we have to track, and there's more you have to do. So the first consideration I want you to be aware of if this is going to be your first year with a partnership or an S-corp is that it's going to cost more money if you go somewhere to have your taxes done.

[00:04:21] Now how much more it's going to cost, I can't say for sure because different firms, different locations, and different levels of expertise or specialization are going to impact that pricing. But like with anything, there's going to be higher-end and lower-end and everything in between. The same way you can get a steak at an Applebee's for $8.99, or you can go to a Ruth’s Chris and pay $89, it's across the board.

[00:04:50] The price point I most often see for entity preparation at better tax firms is going to be a minimum of $1,500 to $2,000 per return for just the filing.

[00:05:02] So keep that in mind when you're looking to create an entity or switch over to being a partnership or an S-corp. Kind of pencil in that ballpark number into your mind as an additional cost. And that number tends to surprise people when they have multiple entities. I think because the big picture price point can add up really quickly, and it's not expected.

[00:05:57] If you look at one of the commonly well-known self-prepare software online, you can do your own entity return. It costs $800 for you to do it yourself with their software or $1,750 for you to have one of their quote tax professionals do it for you. If it's going to cost you $800 just to do it yourself, if you're going to a firm and an expert is doing it for less than that, to me, that would be a little bit of a warning.

[00:06:00] I would just be a little cautious there.

Bookkeeping vs. Tax Preparation

[00:06:02] So now you're aware of the additional costs that can come into play for just the filing. What else might you run into? Well, the next consideration is that bookkeeping and tax preparation are typically separate engagements.

[00:06:50] So if you are expecting to give someone a pile of receipts and bank statements and all of that, and have them organize it into categories and make sure everything ties together, and then use that ending information of total costs for all of your different expense categories to then prepare a tax return, that is bookkeeping.

[00:06:50] So if they're starting with raw information that's not organized at all for the whole entire year, that's going to be an additional cost. That would be a whole separate cost. So be aware of that. If you do not have formal bookkeeping, you don't have QuickBooks and a bookkeeper, at the very least you will want to make sure you have the following information together ahead of time for your tax professional, unless you are also intending to pay for bookkeeping.

[00:07:00] If you don't want to do that, you're going to want to listen on because these are the bare mi...