Top Strategies for Commercial Real Estate Owners to Close Out the Year

  • Analysis phase where we address common topics around Qualified Tax Deductions and Depreciation, and estimating tax liabilities
  • Growth phase we dig deeper into the numbers and look for ways to generate more excess cash flow.

Phase 1 — Stabilization Activities to Close Out the Year

What records do you need to update at the end of the year?

  • Escrow accounts
  • Mortgages

Reconciling Bank And Credit Card Accounts

  • double-counted transactions
  • misclassified transactions

Escrow Accounts

Make sure all your escrow accounts are up to date and reconciled. The process is very similar to the one you use for your checking and credit card reconciliation process.

Loan Payment Reconciliations

This is a common area where owners struggle. The action item for your team is to make sure that you have your amortization schedules in hand and that you compare them to the financial statements.

  1. We see the entire loan payment being treated as a distribution, which would make it fully non-deductible.
  2. When there was some kind of mid-year change resulting in a change to the accuracy of the amortization schedule. This can happen if a payment was missed or terms were re-negotiated on interest rates. Or sometimes there could be a situation of debt forgiveness.

Phase 2 — Analysis

Phase 2 is completely dependant on the accuracy of Phase 1.

Qualified Tax Deductions

A common question that we are asked is “What can I deduct” or “What is a qualified business deduction?”

Depreciation and Section 179 Deductions

Most of you have heard of cost segregation studies. We mostly speak about cost segregation studies for newly built properties or recently acquired. While cost segregation studies can be a little costly, they may be worth it. Then again sometimes the study isn’t necessary and we can figure out the segregation on our own.

A Real-Life Example

For example, if we acquire a property for $1 million, we may be able to identify $50,000 worth of carpeting that may be depreciated and deducted over 5 years versus 39 years. What this achieves is the ability to speed up deductions and further reduce your taxable income in the current year versus later years.

Bonus Depreciation

Bonus depreciation applies to eligible assets. Carpeting, wallpaper, interior glass, cabinets that are built-in, a sink in the breakroom — these are eligible for this 100% bonus depreciation.

Section 179

One very important note though, a Section 179 property can only be depreciated up to the amount of positive net income. Whereas, bonus depreciation can create a loss. Thus, if you have a loss in the property, we don’t like taking the Section 179 depreciation because it is limited. And, you’re not going to get the immediate benefit of it.

Tax Budgeting & How to Estimate Your Tax Liability

Next, we are going to discuss tax budgeting and how to quickly estimate your tax liability.

Net Income Versus Cash Flow

Frequently entrepreneurs confuse the two when thinking about how much they owe for taxes.

Proactively Estimating Your Tax Liability

Complex Method for Estimating Your Tax Liability

The more complex method of estimating your tax liability is also the most accurate. To do this, you essentially proactively prepare a full tax return with all of the information that you have for the coming year. Most of the time, your CPA can do this.

Simplified Method for Estimating Your Tax Liability

In the simplified method for estimating your tax liability, we’re not preparing a whole tax return. Instead, we are doing a whole lot of projection.

Best Practice

After we’ve established what our estimated tax liability is going to be, we recommend moving those funds into a separate checking account. Then, those funds are out of sight and out of mind and you are prepared for any tax payments.

Moving On to Growth

At this point, we’ve covered stabilizing and analyzing in the first two phases. Now it’s time to go to the 3rd phase of planning which using the data we have to make more money and maximize cash flow.

Phase 3 — Grow

With that, I’ll share a story of a recent client.

Breaking It Down

Our first step was to analyze his sales and marketing efforts. We wanted to know what was driving his sales and what were the associated costs. He had significant advertising spend. So, we began by analyzing the return on investment (ROI) of each of the mediums where he was advertising. Quickly, we determined that on one of these platforms, for every $1 he spent, it was generating $15 in gross revenues. A 15:1 ROI. That’s ridiculously awesome.

What The Analysis Found

In total, these two steps alone resulted in an additional $20,000 per month in his pocket. That was just analyzing the sales and marketing part of his budget. We had not even begun to dive into the true operational structure of his operations.

Final Notes to Close Out The Year

We hope this information helps you close out your year right! As you have seen, the reality is, it’s best to stay on top of your finances all year.

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STRATAFOLIO

STRATAFOLIO

STRATAFOLIO is an online software solution that provides real-time data analytics for commercial real estate portfolios in an intuitively designed dashboard.