A lot of Expenses and Still paying Taxes

[Roy Gutierrez]

Hi guys,

I just got my taxes done by my accountant and it turns out that I have to pay over 3K for 2014 (yes I was waaayyy behind but finally got my act together and pulled everything into an accounting package). Unfortunately I'm very ignorant with my accounting and now I'm paying for it. So basically I'm going over what he sent me, I started analyzing the Schedule E that has my 3 rentals and noticed the total expenses are WAY lower than what I gave him on my reports, so below I give you the example of one of the rentals (all 3 have the same characteristic, my accountant has expenses WAY lower than what I sent him on my report):

House 1 - long term rental - Schedule E (house bought in 12/2013)

   Income: $9,346

   Expenses declared by accountant: $9,992 (this is what he somehow figured out)

   Now on the report that I gave him my total expenses are $30,300 (repairs $11,792, supplies $8,329, the rest were renovations and other stuff), so there was a lot of work on this property.

I asked him why the difference and his response was:

"I made some assumptions in the earlier years about capitalizing costs vs. repair costs. I capitalized a lot of the expenses because prior to renting you're supposed to put it into the depreciable base"

Now before responding to him I thought I have to figure out what the hell he means by this, so I went to the web and found this:

Capitalize is an accounting method used to delay the recognition of expenses by recording the expense as a long-term asset. In general, capitalizing expenses is beneficial as companies acquiring new assets with a long-term lifespan can spread out the cost.

So I guess he's recognizing about 1/3 of my expenses and the rest of the expenses he plans to deduct over time for future years? (what time period I have no idea, I guess I have to ask him). Does this make sense to you guys? Is this the way your accountant handles your expenses (including repairs) for your long term rentals?

Thank you very much in advance for any help/input. 

[Joe Splitrock]

My guess is some of this has to do with your in service date which is the date the property is rent ready. That happens after renovations are completed, so has an effect on how and what you can claim. Also keep in mind that many improvements are depreciated, so you only claim a portion of the expens for a period of years.

I am not sure why you are so far behind on taxes, but my advice is to get your business in order. Hire a bookkeeper if you need help.