Accounting Method
I am doing my taxes for my rehab I sold in 2005. I understand that all costs are my costs of goods sold. I kept all my costs on a spreadsheet to come up with my dollar amounts. Turbo tax is asking me if I use the cash or accrual accounting method. Says Something about the accrual method if you have inventory, which I know the rehab was. Which one am I?
On another note. Going thru turbo tax, it asks for business expenses like vehical expenses and credit card interest. I did drive back and forth to the rehab hundreds of times and I used credit cards for the rehab costs so I do have interest. Do I put these things under the cost of goods sold section since they were all for this one property or under general business expenses? Arent the business expenses related to things like business offices and such? I dont have one.
[ Edited by billfaith on Date 01/27/2006 ]
Quote: Accrual is defering the expense or income until another period. billfaith,
Maybe this will clarify.
The cash method of accounting recognizes income when it is actually received, and, recognizes an expense when it is actually paidThe accrual method recognizes an expense when it is incurred even though it may be actually paid later, even in another year, and, recognizes income when it is earned even though it may not be actually received until a later period.For example, You rent your unit to a tenant who moves in on December 20. Because it is the Christmas season, and you trust your new tenant, you agree that the tenant can include the partial rent for December with the January rent that you will collect at the beginning of the month.
Under the accrual accounting method, you include the December rent in your total rental income for the tax year even though you did not actually receive the rent money until the next year.
Under the cash method, you do not have any rental income in December; instead, that rent is included in your January rental income because that is when it is received.Your taxing authority collects property taxes in arrears. They mail you the 2005 property tax notice in late October with a due date of January 15, 2006. You pay the property taxes on January 12, 2006.
Under the accrual method of accounting, the property tax is a deductible expense in 2005.
Under the cash method, the property tax is not claimed as a deductible expense until 2006.
As an aside, i am not sure that the accounting method really makes any difference to you when you are acting as a dealer to real estate. The tax rules for dealer realty do not allow you to recognize inventory as "acquired" until the year that it sold.
If you buy your property in 2005, rehab in 2005 and early 2006, then sell in 2006, this property is not placed in your inventory until 2006. All the costs you incurred for the property are included in the cost of goods sold in 2006, even though you may have spent a significant portion of your money on that property in 2005.
For your business overhead expenses, such as office supplies, business cards, office rent and utilities, you may as well be a cash basis taxpayer.
[ Edited by NewKidInTown3 on Date 01/28/2006 ]
Thank you very much!