‘Be Proactive, Not Reactive’: How Owners and Developers Can Combat Costly Accounting Errors

As seen in Bisnow, written by Elizabeth Reyn:
https://www.bisnow.com/new-york/news/investment/anchin-owners-developers-accounting-errors-studiob-129432

While developers and owners are often laser-focused on design, amenities and tenant satisfaction, when it comes to their properties, they can’t forget the day-to-day tasks that keep builders operational.

One of those key tasks is keeping their financial records up to date. Those who aren’t consistently on top of their books and records not only run the risk of making errors, which can be time-consuming and costly to resolve, but they may also miss out on tax savings.

Joseph Perotta, director and member of the client accounting advisory services group at Anchin, a full-service accounting and advisory firm, helps real estate clients and their accounting and finance teams pinpoint and resolve accounting discrepancies and create budgets and financial projections.

“The biggest point we emphasize to our clients is, ‘You want to be proactive, not reactive,’” Perotta said. “When we analyze and project our clients’ financials, we identify potential problems and risks and present them with solutions so they can proactively get ahead of or fix any situation rather than wait until it’s too late.”

Perotta walked Bisnow through some common accounting problems that real estate owners and developers may face and how to address them.

Improper Cash Flow Tracking

Monitoring a company’s cash flow can be a daunting task, and without a proper system in place, owners and developers may find themselves in hot water, Perotta said. This can lead to issues come tax time and even lead to missed mortgage payments. Also, if they aren’t aware of how much liquidity their business has, they could run the risk of leaving money on the table for future investments.

Anchin helps its clients implement a rolling cash flow forecast, or a financial planner that shows the cash predicted to come in and out of the business on a monthly basis, usually for up to a year. The tool updates at the end of each month, showing the next month’s projected financials.

“Having proactive cash flow management means businesses can avoid surprises, meet their financial commitments and ensure they’re making smart investment decisions,” he said.

Ledger Discrepancies

When owners and developers or their accounting teams are not categorizing their records properly or are assigning the wrong tax codes to their financial transactions, it can negatively impact statements and cause delays in submitting reports.

This often happens when expenses are misclassified, Perotta said. Resolving these errors can be time-consuming and involves substantial cleanup.

Anchin offers two solutions to this problem. The firm can either work with the company’s accounting department, if it has one, to provide monthly oversight of the books and fix any errors or do the accounting on behalf of the company.

Perotta said that companies can also use software to track expenses and create financial projections. Software with artificial intelligence capabilities enables them to upload and interpret invoices.

“Having a streamlined process helps companies save time by cutting down on manual work and leads to fewer errors,” he said. “Companies can act upon risks or opportunities faster if they can close their books on a monthly basis.”

Compliance Issues

Perotta said internal accounting departments may not be aware of the need to file sales tax, which can come with penalties if left unpaid.

“Most people think real estate doesn’t have to file sales tax, but they do,” he said. “Usually, people only think of sales taxes as the sales of a product and assume that when you’re renting a space, it’s not subject to sales tax. There are some components, however, such as electricity, that could be subject to sales tax or some items that can be subject to use tax. If you don’t pay sales tax upon purchase, you must file a quarterly use tax return.”

He said that Anchin takes care of the state and local tax filings for its clients and ensures that they are prepared for any potential audits, including having clean and organized financial statements that can be readily shared with auditors and withstand scrutiny.

Financial Data Confusion

Even when clients are properly tracking their financial information, that doesn’t mean they have an easy way to interpret the data, which could cause them to miss out on opportunities toward their bottom line, Perotta said.

Anchin can step in to provide this picture, with dashboards, key performance indicators and budgets to help break down the financials and aid clients in their decision-making.

“Our job is to make the numbers meaningful for our clients. That way, they’re not just seeing random costs but how they can make better financial decisions,” he said. “Clients should see the data and think, ‘Do I have extra cash? Can I make investments? Can I purchase more property?’ They should see the bigger picture of how to grow their companies without getting into the weeds of the books.”

Tax Losses

Another way owners and developers potentially miss out on tax savings is by misclassifying their expenses, Perotta said. When Anchin analyzes a company’s bills, the firm can determine what clients can expense versus what they can capitalize, depending on what the invoice is for.

“Doing it properly can save you a lot of tax dollars at the end of the year when you’re filing your tax return,” he said.

Anchin can also perform cost segregation studies, or a strategy for speeding up depreciation on aspects of real property, such as fixtures and furniture, over five, seven or 15 years, as opposed to the typical 27.5 or 39 years that it takes for it to depreciate.

Perotta said that while some companies may think that a cost segregation study can only be done on a new building, it can also be done on a build-out as well, which enables faster depreciation.

Whether Anchin is working with the accounting team or in charge of the client’s books and records, its goal is to ensure the client is taking advantage of savings and getting its financial statements and taxes filed on time, Perotta said.

This article was produced in collaboration between Anchin and Studio B. For more information, please contact Joseph Perotta, or your Anchin Relationship Partner.