‍Cash vs Accrual Tax Accounting for Property Tax Teams

When it comes to property accounting, there's no one-size-fits-all approach. Within an organization, property tax accounting can be nuanced and unique to the needs of the business, the size of its portfolio, and a number of factors.  

What is accrual accounting?

Accrual accounting is one of two methods of accounting (the other being cash accounting). Most simply, accrual accounting means that revenue and expenses are recognized and recorded when they occur, while cash-based accounting means that revenue and expenses are not recognized unless there is an exchange of cash.  

For most companies, accrual accounting is the standard accounting practice. That’s because the accrual method smooths out expenses and earnings over time. As such, it provides a more accurate – and dynamic – picture of a company’s current economic position.  

But accrual accounting is harder to implement. One reason for this is it requires unearned revenue, prepaid expenses, and other items to be considered. Prepaid expenses are the more common issue for real estate teams, as property tax can be billed and paid in multiple installments and across more than one tax year and/or fiscal period. We’ll explore more of the challenges below.

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Why are accruals important?

Along with being more accurate and dynamic, accrual-based accounting provides more granular detail and helps companies plan for the future. By recording accruals, a company can better understand and measure its business activities and keep track of future cash flows. As property tax is typically one of the largest operating expenses for multi-property portfolios, having a clear picture of future cash flow is an important component for management.

Accrual-based accounting also allows you to tie the jurisdiction’s property tax year back to your business’s fiscal year. Because the tax year varies between jurisdictions, it’s inevitable that some (if not many) of the jurisdictions you operate in won’t align with your fiscal year.  

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What are some of the challenges of the accrual method for property tax teams?

Usually, accrual accounting is done over a 12-month period, but this isn’t always the case. Some retailers, for instance, will use a 13-period calendar (where each period is exactly 4 weeks). Others will use a 4:5:4, 4:4:5, or 5:4:4 periods, in which the extra week is added on in each quarter of a selected month. And some companies are even more sophisticated in their ordering of these periods.

Compounding these complexities is organizational structure: accrual accounting is typically handled by an accounting team, but language and terms may not be consistent with that of the property tax team. These nuances make communication and collaboration difficult. Translating the data and numbers between teams can be an added challenge.  

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How to leverage software to streamline accrual-based accounting

Because accrual-based accounting in property tax is particularly complex, having a dedicated tool to manage the moving parts can help improve accuracy, collaboration, and efficiency.  

For instance, you’ll want to look for a tool that can:

• Deal with different taxation periods and automatically match them to your company's fiscal period
• Automatically update and/or adjust accruals as new, actual information becomes available
• Manage your accrual process centrally and in bulk (to avoid having to make individual property adjustments)
• Accommodate varying accrual periods (12, 13, 5-4-4, etc.)
• Track running accrual balances in real time
• “True up" when final property taxes have been billed or paid

Alongside these, below are other features that come in handy for managing your accruals.

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Integrates directly with your General Ledger (GL) for automated postings

Property tax liabilities need to be tied back to your GL to ensure sufficient cash flow. Tools like the itamlink property tax software provide qualified standard and custom integrations, allowing property tax liabilities and payments to be recorded centrally, then automatically sent to your GL.

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Ensures the right team members and stakeholders can access the data

Because property tax accounting usually spans multiple departments, ensuring stakeholders have access to the data they need is paramount for efficiency and decision-making. Tools like itamlink provide configurable roles and permissions that can be set by IT administrators from a central location. That way, property tax and accounting teams can more easily collaborate, and senior leaders can access the high-level summaries they need.  

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Produce reports based on assumptions and actual accrual data

The ability to quickly and accurately pull reports on accruals is important for both day-to-day activities and also in reporting to senior leadership. The software solution you work with should allow you to quickly pull data that allows you to compare your assumptions to actual accruals.  

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This post is part of Rethink Solutions’ Forecasting, Budgeting, and Accruals Series. This post was written by Mordechai Katzman, President of Rethink Solutions. Mordechai has more than 20 years' experience advising firms on property tax management strategy, technology, and processes. He has spoken locally and internationally at events for the International Property Tax Institute (IPTI), Insititute for Professionals in Taxation (IPT), and the Council on State Taxation (COST), to name a few.  

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