How to Account for the Cost of Building & Real Estate Taxes

How to Account for the Cost of Building & Real Estate Taxes

If your company bought a building for business use, you must account for the price of the construction and the real estate tax due on the construction each year. The Internal Revenue Service (IRS) considers a building a capital asset, a designation assigned to all company property deemed to have a useful life of over 1 year. Capital assets can’t be expensed in the year purchased; instead, the assets have to be expensed over the useful life of the home as determined by the IRS. Real estate taxation can be expensed when paid or if incurred, if you’re utilizing the accrual method of accounting.

Record the Building Cost

Make an account in the assets section of the accounting general ledger, known as”Construction”

Document the price of the construction in the new asset account. If you financed the construction, you can consist of closing costs.

Document the whole cost of the construction for a decrease to the checking account used to make the building buy. If you financed the construction, record the whole cost of the construction as a rise to the mortgage payable account in the accountability section of the general ledger.

Review IRS regulations for depreciation at year-end to determine the useful life designation and the essential method of depreciation for the construction. The principles for depreciation can change, therefore it is crucial to review the present laws. Additionally, the IRS occasionally gives special consideration to depreciation of certain assets and permits you to cost more than the typical amount in a given calendar year.

Calculate depreciation for the construction according to the current IRS regulations.

Document the depreciation as a rise to the accumulated depreciation account in the general ledger’s assets section.

Document the depreciation as a rise to the depreciation expense account in the cost section of the general ledger.

Record Real Estate Taxes–Accrual Method of Accounting

Create a”Real Estate Tax Expense” account in the cost section of the general ledger. Create a”Real Estate Tax Payable” account in the responsibilities section of the general ledger.

Divide the annual property tax cost by 12 to get the monthly cost amount. If you don’t yet have a bill to the calendar year, use the prior year’s bill as an estimate.

Record 1 month of estate taxation as a rise to the property tax cost account each month during the entire year.

Record 1 month of estate taxation as a rise to the real estate tax payable account each month through the year.

Document the sum paid for estate tax in year-end for a decrease to the checking account.

Reduce the”Real Estate Tax Payable” account to reflect a zero balance. You’re essentially reversing all of the accrued expense since you’ve paid the bill.

Record any difference between the actual amount paid and the total accrued as an increase or decrease to the property tax cost account.

Record Real Estate Taxes–Cash Method

Create a”Real Estate Tax Expense” account in the cost section of the general ledger.

Document the whole sum paid for property taxation at year-end for a decrease to the checking account.

Document the whole sum paid for property taxation at year end as a rise to the”Real Estate Tax Expense” account.

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