Bookkeeping and LLC's: What is your experience?

Question

Hello!  I am new here, but not necessary that new in real estate.  A few years back my wife and I borrowed money from our equity (HELOC) to purchase another home.  We moved into that new home to fix and flip.  Now we have done that several times.  Sold some; rented others.  Three have become short term rentals.  Every year about this time, we begin shoring up our finances, bookkeeping, and the like.

We have an LLC, but some of the homes were purchased under our name.  Some were under the LLC.  We first had separate checking accounts for each house, but that can be a headache.  By the advice of a real estate lawyer, we moved all funds to one account then started using quickbooks for our bookkeeping.  Now it is still difficult to tell which house is doing what from month to month.  Projecting expenses is even more difficult.  Our bank balance looks good...and then it's not.  Now we have another real estate lawyer telling us that an LLC for each property would be best with each property having a separate checking account.  Even the lawyers can't agree!

Have any of you bounced these issues around?  Before I switch back, make a change, etc...I want to get some more advice from people like you who are living with this issue day to day!  Thanks in advance for the comments.

Michael Plaks · Answer

@Dr. David Miracle

Welcome to BP!

Let's start with separating the four issues: legal protection, taxes, bookkeeping and business operations.

Legal protection is for attorneys, and I'm not one. And you're correct: it would be a miracle (lame pun intended) if two lawyers agree on anything related to asset protection. They never do. Some recommend one LLC per property, some recommend combining, and some recommend Series LLC that exist in several but not all states. We have some non-attorney guys here on BP who will post their full-page charts on how to structure your companies. Bottom line: there is no consensus. Find one attorney you like/trust and follow his/her religion.

Taxes normally do not change when you have LLCs. You just have to separate income and expenses by properties in whatever way you use. In QuickBooks, you should use the Class feature for this separation: one class per property plus a general overhead class.

Bookkeeping is tricky. The unfortunate predicament is that you can either record numbers for tax purposes or for cash flow purposes, but not for both. Normally, you record things for taxes. When you print the Profit & Loss report for tax purposes, it does NOT tell you how profitable you are in real cash flow terms. You have to make adjustments, either yourself or with professional help. I wish I could give you a simple fix.

Business operations is yet another issue. Separate banking accounts are sometimes recommended by lawyers for legal protection, but they (both lawyers and separate accounts) are a pain in your rear. I recommend that my clients use a consolidated account for rental management but carefully track expenses by property in QuickBooks.

Just keep in mind that these are all separate issues. You can have multiple holding LLCs but manage all of them from one business bank account - just like property managers operate when they have multiple clients.

Account Closed · Answer

I'm going out on a limb here.

Since each LLC has it's own company name and tax codes.  Every accountant and every expert will tell you that you will need to setup each LLC in their own Company File, and I have for years been teaching people this as well.  UNTIL today!

The above answer would be absolutely correct if YOU were going to file your taxes YOURSELF! But most landlords won't.  We will use a CPA or an Accountant and therefore we don't have to be that rigid.

QUICKBOOKS IS YOUR VERY BEST FRIEND.  But us professionals have been making it more complicated.  So as of this date, as of now, I will be teaching it to where it will be easier for you to use.

Basically when we search for a software program, we aren't thinking about using it to file our taxes ourselves. We want something to show us income  and expenses for each property, and what our bottom line is.  We count on our Tax person to take care of all the legal jumbo mumbo stuff, and it  is through THEIR software program that they submit the data we send THEM to the IRS.

Therefore, based on making life easier for you and how you can use Quickbooks this is my answer.

You  say you have some  properties under your own name, and some under LLC's.

There is a class feature in QuickBooks that will keep track of everything for you and give you your bottom line per property and per LLC.

Click on Class (Make sure you turn on the Class Feature in QuickBooks Preference Section Accounting Section) and...

type in your Name as a header.

Example :     David Miracle  (Header)

1234 Angel Drive (listed  as a sub-class of David Miracle)

5678 Goodwill Circle  (Listed as a sub-class of David Miracle)

You would do the same thing with all the LLC's.

Sunshine Investments (Header) First LLC

1624  Round Lake Drive  as a sub-class of Sunshine Investments

Palmway Properties  (Header)

5678   Palm Tree way as a sub class of Palmway Properties

And on and on and on.

You could use the same  scenario for your business bank Account

Example:

Chase Bank   (Business Bank Account Header) in your Chart of Accounts

David Miracle as a Sub Account of Chase Bank

SunShine Investments as a sub-account of Chase Bank

Palmway Properties as a sub-account of Chase Bank

Whenever you need to give your CPA data regarding the above properties you would do it via the Profit and Loss Class Report which gives a break down of income and expenses and your bottom line per property, per LLC...etc.

Profit and Loss Report by Class           Profit and Loss Report by Class                      Profit and Loss Report by Class

David Miracle                                            SunShine Investments                                           Palmway Properties

The only problem doing it this way, is that you have to really be on your toes.  Because this entails linking everything you do to the correct accounts and properties.

What the IRS wants to see is where the money came from. (Income)   What did you spend your money on (deductions)

And they want proof.  They don't care what software you use or how you use it.  Heck some people use just a piece of paper and a pencil and have for years, and has never been a problem.

The bottom line is:

What do you need to see?

What do you want Quickbooks to do for you?

And how you can give all this information to your CPA or Accountant in order for them to DO YOUR TAXES!

And be able to have them file your taxes based on an orderly, logically, understandable break-down.

And QuickBooks can do all this for you through organization,  and that is through Headers and Sub-accounts and Sub-Classes, and finalizing it by a Profit and Loss Report by Class.

Nancy Neville

Simon W. · Answer

I am a Property/Developmental Controller and a Consultant.

Here's my free advice. Separate Entity means separate bank accounts. Do not lump everything into 1 account.

As far as tax purposes and what is your actual net income (profit or loss), there should be a way to show both. However, QB is not my go-to software so I can't say how customizable it is.

Miryam Kenet · Answer

Dr. David Miracle,

I am also new at BP, but also not new in real estate. I am, like you, trying to streamline my book keeping and I am very grateful to you for bringing this topic to the table.

I do keep a different bank accounts for each entity for tax and legal reasons, but since I don't have that many,  I don't find it difficult to manage them online.

This is a question for Simon W:

What is your go-to software and why do you use it instead of QB?

Thank you all for sharing your knowledge. BP is amazing...

Miryam Kenet

Stanley Bronstein · Answer

@Dr. David Miracle

Here's my free advice. Take it for what it's worth and use it as you wish.

In my opinion, every separate entity should have a separate Quickbooks account. If you read the loan covenants on most commercial loans, you probably have an obligation to maintain separate books and records for the borrowing entity that received the loan.

It's okay for one Quickbooks account to have multiple bank accounts in it, but if have separate entities, I recommend having separate Quickbooks accounts set up.

It's just a cleaner way to do business.

Simon W. · Answer

@Miryam Kenet - I use Yardi. I used Yardi Enterprise (old software -outdated), Yardi Voyager 6-7S, and Yardi Genesis. It just easier to use since it caters to Property Management. The accounting aspect is great as well. Lots of features.

Gita Faust · Answer

OK - if you are using QuickBooks only for tax purpose, then I recommend using a pencil and paper. No offense to anyone.

You should be using QuickBooks to budget, forecast, cash flow, knowing how much you owe and own, when, to whom, where etc. and know your equity.

Accounting and bookkeeping is work, so is building a real estate empire. Track every penny.

On this note, I am chiming off to start my weekend.

Gita

Miryam Kenet · Answer

Thanks a lot for the info Simon, and sorry it took so long to replay. I am still getting used to BP...

David Miracle · Answer

Thanks guys for contributing to the discussion!  David

Bookkeeping and LLC's: What is your experience?

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