How to Determine Business Deductions and Do Your Accounting Based on Cash Or Accrual

Business Deductions
One of the things I try to remind people of is to always be thinking. It’s not only the obvious expenses of your business, there are a lot of other business deductions you should be thinking about. Obviously if you spend $100 to replace a window that’s a business expense – that’s as clear as day.
What I’m talking about is if you have to drive over to your property to pick up rent, that mileage is a business expense and it’s deductible. You should be tracking it and deducting it.
If you use part of your home office or your home to do your accounting to run your business, you can deduct a portion of your home expenses. These are things that are not that intuitive.
Any sort of educational material – books and things like that – are deductible. If you have to wear specialized clothing – work clothes, boots or anything like that as part of your business – they’re all deductible. Think outside the box a little bit in terms of additional expenses that maybe are not quite so obvious to you, but they are business expenses and really should be deducted.
Cash Versus Accrual
We talked about the income statement. One of things I want to talk about is what I call cash versus accrual. There are two ways to do any real financial accounting. You can do it on a cash basis or on an accrual basis. I’ll explain both of these.
A cash basis is you only book either an expense or an income when the cash is received. For example if your rent is $1,000 and you received $1,000 on Sept. 3rd you would book an income of $1,000 for September. That would be simple.
Then October comes along. The tenant pays you $1,000 in October and so you would book $1,000 in October. It’s very simple.
However, let’s say your tenant for some odd reason – hopefully it doesn’t happen – doesn’t pay you in September. They have a problem, maybe the checks got delayed, a new job or whatever and they have a gap.
They say, “I’ll pay you October 2nd but I’ll pay you both months.” You say that’s fine. On October 2nd you get a $2,000 check. In the cash basis accounting you would not book any income for September. You would book $2,000 in October. That is true cash accounting.
Accrual would be the opposite. You would book it in September because even though he didn’t pay you then you earned it in September. You earned it in October. So you would show $1,000 in September and $1,000 in October, even though you got paid $2,000 in October.
The accrual accounting kind of smooths things out. In cash accounting things only happen when cash hits your accounts.
Expenses are really where accrual accounting really becomes the preferred method. Things like real estate taxes maybe you pay once a year. Let’s say your taxes are $1,200. In the accrual based accounting you would be booking every single month $100 real estate taxes, even though you don’t pay it until the end of the year. You would still be booking that expense $100 each month.
On a cash basis you would book nothing all year and then on the month you paid the $1,200 you would book $1,200. The weakness of cash account is it does show some variability and accrual account will smooth things out. Either one is fine for your typical landlord.
The only thing I recommend here is do not go back and forth. I’m speaking from experience. I’ve done a little bit of this. I’d use a little bit of cash, I’d use a little bit of accrual – sometimes I’d go back and forth a little bit.
I really recommend that you pick one or the other and stick with it. When you go to do your tax returns you can use either one. You just have to declare it when you do your tax returns. If you’re going to pick one, stick with it. That’s really the important feature here.