Kevin Hansen, CPA Hunter Group CPA LLC (201) 693-9804 This e-mail address is being protected from spambots. You need JavaScript enabled to view it More Info

How you pay a bill makes a difference, particularly to the IRS and your accountant. Mixing expenses between companies or between personal and business tends to be a fairly common activity, particularly for small business owners. However, business owners with commercial property, particularly owners of rental property, should be careful not to mix expenses from one entity to another. While on the surface it would appear to be no big deal, the authorities may see it as sloppy at best, or worse, shifty enough to warrant investigation or penalty.

Consider the rental property expense issue. Say you have two commercial properties you are currently renting. The buildings are (hopefully) owned in a separate LLC apart from your other business interests, including other buildings.

Your tenant in BuildingOne calls with an emergency plumbing problem. Unable to resolve it with your own internal manpower, you call your plumber. He arrives, fixes the problem, but demands a check—or perhaps a little discount for paying cash. Thinking you are saving money, you open your wallet and pay him. He provides a hand written receipt, which you promptly stuff in the visor of your pickup truck for safe keeping.

That was January. Now, it is April and the first bright and sunny morning day glares the sun at you as you ride down Rt. 80 heading east. Pulling the visor down you find the plumbing receipt. That evening, you look closer at the paper and try to remember which tenant the repair was for and why. Frustrated, you put it into your QuickBooks™) as a cash expense for BuildingTwo. No big deal, right?

Let’s start with the obvious attempt to evade paying sales and use tax. Perhaps you mistakenly believe the Treasury folks working for the State of New Jersey are not looking. Not true. In fact, the collection of sales and use tax is an area they (the State Government) take very seriously. We have had many clients subject to routine sales tax audits over the last couple of years, and while I insist clients be compliant (lest they cease being clients of Hunter Group) there are times when collection issues get murky. Agents look for behavior as much as they look for mistakes. In negotiating, it is far more difficult to talk when obvious attempts to evade are documented. Using cash is also a red flag for both the payee and the vendor. You can bet the next call will be to the vendor to have a little review of his receipts and deposits.

Next consider the misplacement of the payment from BuildingOne to BuildingTwo. The error places higher expenses in one company and fails to disclose expenses in another. If you try to track performance of the property, it becomes impossible to determine if the business is viable or unprofitable. Are rents reasonable? Are more serious renovations required? Is it time to evaluate the viability of this investment? If you keep solid records, these important financial reports are not difficult. If you have a mortgage or line of credit, your banker will want accurate accounting as well.

Keep in mind the resale aspect of record keeping too. If personal money is mixed with the commercial property, or if expenses are sloppily mixed from property to property, will a potential buyer feel suspect of the entire investment? Will the asking price be challenged on this basis?

Of course, your bookkeeping will be a mess, and your year-end tax planning more difficult to handle if you cannot accurately segregate expenses properly.

If you have employees—especially employees who may have some limited ability to hire and or pay contractors—having systems in place to keep payments and invoices properly assigned protects you from potentially business-killing fraud. Remember, even good employees may be prompted to behave badly if the owner shows them such behavior is ok.

Segregating costs and expenses, vendors and suppliers is also smart for protecting your property from potential litigation matters if anything should ever go wrong with a vendor or a tenant. This is particularly true if you are assessing common area maintenance (CAM) charges to tenants as part of their lease agreement. Sooner or later, they will want an accounting of these expenses, and you will want to be able to assemble an accurate and reasonable accounting to avoid litigation.

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