As February rolls along, it may be a good time to start thinking about filing those taxes of yours; yes, it is officially tax-filing season! As that April 15 deadline creeps closer and closer, Real Estate professionals are scrambling to find the best ways to pay as little as possible without raising any IRS red flags. To help all of our Real Estate friends, we have compiled a list of the most common tax filing mistakes agents make that can end up costing them thousands.
If you are like most, educating yourself on the year’s newest tax laws typically aren’t at the top of your to-do list. Luckily, there are plenty of reputable accountants & industry experts who do the work for you. Alan Rohrer, CPA talks about the new “Qualified Business Income” tax exception in his article on the popular and well-known blog “Money Done Right”.
The Qualified Business Income tax provision can result in a deduction on 20% of your net income. Alan explains the provision like this, “the provision includes income you make that “passes through” to your individual return. For most people, this is any income they don’t make in a C corporation.”
Here is a great example for agents,
Take your Revenue– Let’s say it was $350,000 (R) and your expenses were around $200,000 (E). Subtract your Expenses from your Revenue. Your income would be $150,000.
Prior to the Qualified Business Income Tax provision, you would pay a tax on the entire income amount of $150,000. Now, your “pass-through” deduction would be $30,000, so you would only be paying tax on $120,000.
According to Alan, the amount you will actually save on your taxes depends on what tax bracket you fall in, if you are a single filer or married filer, how you plan to fund your lifestyle and various other factors. It is always best to talk to your tax advisor about your options.
For most Real Estate Agents, spending a significant time in the car is nothing out of the ordinary. In 2019, you will be able to deduct 58 cents per mile driven for business use (up 3.5 cents from the rate for 2018), 20 cents per mile driven for medical or moving purposes (up 2 cents from the rate for 2018) and 14 cents per mile driven in service of charitable organizations (rate is unchanged from 2018).
Make sure you document all of the trips you made to show homes, do some neighborhood research, attend continuing education classes or even drive clients around to view homes. This may sound like a pain in the butt, but of course like for everything else these days- there is now an app for that. Some of the most popular apps include Mileage Expense Log, MileIQ and TripLog. These apps create IRS friendly reports and also automatically track your trips.
The Home Office deduction can offer huge savings during tax time for remote workers like many Real Estate Agents if filed properly. This deduction can be the most confusing and misunderstood for many people so it is important to take your time and read all of the guidelines.
There are two different methods for calculating your Home Office Deduction, The Regular Method and The Simplified Method (new starting 2013, this option can significantly reduce the hassle of record keeping by allowing the taxpayer to multiply a prescribed rate by the allowable square footage of the office).
Regardless of which method you choose to use, you must first meet these two requirements.
Part of your home must be used regularly and exclusively for conducting business. For example, if you have an additional room that you utilize to run your business, you can take a home office deduction for that room. You also must prove that you use your home as your principal place of business.
If you are a top producer in the Real Estate industry, you probably have a decently sized marketing budget. Some common marketing costs come from spending on postcards, flyers, business cards, virtual staging, billboards or even Zillow ads.
Crystalynn Shelton CPA and staff writer at Fit Small Business says that “you can expect to recoup roughly half that expense in tax deductions.” She also recommends using Premier Agent by Zillow if you don’t already-especially knowing that you’ll receive half of that cost back!
If you are like most agents, staying ahead of the curve and attending out of town conventions, seminars or any kind of educational event is a common practice.
Crystalynn Shelton, CPA and staff writer at Fit Small Business says that you can generally write off 100% of all business-related travel expenses and 50% of all business-related entertainment expenses. Some of these travel deductions could include airfare, hotel costs, car rentals, meals, etc.
In order to deduct 100% of these travel costs, the costs must be categorized as as ordinary and necessary. “An ordinary expense is one that’s common and accepted in your trade or business, while a necessary expense is one that’s helpful and appropriate for your business.”
Costs that you incur while entertaining a client, customer or employee are also deductible. Some common deductible expenses include theatre tickets, sporting tickets, restaurant meals & drinks and nightclubs (cover charges, beverages, etc.).
There are certain entertainment expenses you are not allowed to deduct like membership dues for a golf club or airline club. For more information on what you can or cannot deduct from entertainment expenses, visit Crystalynn’s full article here.
Tax time can be stressful, especially for Real Estate Professionals and Self-Employed Individuals. Make sure you do your research, have the right plan in place and chat with a tax advisor or CPA so you know that you are getting the most out your tax return.. legally.