Preparing your taxes becomes a bit more complicated when you are a Realtor. In addition to the state and federal taxes you may owe, you’re also owe self-employment taxes.
You are considered to be self-employed and that means you need to do a bit more record keeping to maximize your expense deductions. Taking the small amount of time to keep good records is essential. It doesn’t have to be time consuming and it can make a big difference.
Let’s look at what kind of things can write off.
Tax Deductions For Realtors
Marketing Expenses:
Business cards, website fees, MLS dues, lead generating expenses, posters, signs, sponsorships, commercials, advertising, business card, flyers and anything else you do to get business is for the most part deductible.
Gifts and Referral Rewards:
Gifts to clients are generally limited to $25 per person, per year. (You can give more, but that’s the deductible amount.) Be careful of referral fees. Rules vary from state to state, along with RESPA requirements that amount to how and to whom you may pay those fees, so, do your homework before paying these. If the fees are legal, there are ways to deduct them, but check it out first before you spend your hard earned dollars.
Training, Education and Licensing:
Continuing education is an important part of your job to keep you up to date and strengthen your ability to effectively sell real estate. Those expenses are deductible. Classes, seminars, books and certificates mostly all qualify.
Insurance:
This is commonly called Errors and Omissions Insurance. If your state or agency doesn’t require it, get it anyway! Also, if you pay a rider to your car insurance for business use, the difference between that and regular insurance is deductible. There is also a self employed health insurance deduction that allows you to deduct your health insurance costs if you have no other insurance source (you will be better off though if you can get insurance through your spouse.)
Entertainment Expenses:
There are those occasions when you’ll need to entertain a client. Maybe you’ll pick up the tab for lunch or dinner. Generally speaking these are deductible if they were incurred with the express intention of selling a property now or in the future. Keep a 9×12 envelope in your car and when you entertain mark the clients name on the back of the receipt along with maybe a 2 word description of what was intended. i.e. “house hunting”, “referral source”, “potential client” or something like that.
Travel Expenses:
So you’re taking a trip to New York to attend a seminar and, what the heck, while you’re there, why not soak up the culture. People have a tendency to want to merge personal and business travel. The problem is that you should only deduct travel expenses that are directly related to your job and little else. Keep your business and personal trips separate if you can. Spending 2 hours tending to business over a 3 day period is pretty easy to see through if you’re audited. The Golden Rule – “Only take tax deduction for trips that have the sole intention to increase your money making abilities.”
For deductible travel expenses, you can take airfare, rental cas, tips, taxis, laundry, internet and phone, as well as 50% of meals and any other reasonable and necessary expenses. By the way, travel means overnight trips away from your home area.
Cell phones, laptops and tablets:
Your best practice would be to keep a separate computer, phone and/or tablet that are dedicated to your business. If you don’t, you’ll have to figure out the percentage that is used for business and may have concerns regarding the listed property rules!
Vehicle Expenses:
Do you know that this one expense may be the largest deduction you’ll get? At 56.5 cents per mile for business miles driven for the 20,000 miles you drive to do your job that’s a $11,300 deduction. Skip tracking bills for repairs, maintenance, gas and most other expenses when using your car for business. That’s all covered in the mileage allowance. You do get additional deductions for license taxes.
The easiest way to track your business miles is to use one of several apps that you can download for your smartphone. Triplog is a good one. The other is keep a notebook or a calendar and mark down where you traveled. From there use Google Maps to find the mileage, mark it in your notebook and tally it up at the end of the year. I’d go with the smartphone app.
Home Office:
Again, the smartest thing is to have an area in your home that is used strictly for business. It must be used regularly and exclusively for business. From there you can deduct rent, interest, taxes, utilities, insurance and repairs based on the percentage of square footage of your home that your office space occupies.
Additional Expenses:
Many of you keep an office at your place of employment and pay for that space. You may also have to spend money on Supra box, professional dues and E & O. Everything your employer charges you ought to be deductible, so don’t forget to keep track of them.
Let’s not forget the cost of the office supplies you consume during the year. Paper, Injet ink, envelopes, paper clips and any other supply required for you to do your job is also deductible.
Depreciation:
Higher priced items that have a useful life of over a year should be depreciated rather than deducting the cost all at once. Examples would be a computer, camera, phone, office furniture, tablet or printer.
Record Keeping:
Don’t waste your precious sales time trying to track everything with some kind of accounting software. The easiest way is to buy a bunch of 9 x 12 envelopes, label them for each month and keep them in a convenient place so that when you come home at the end of the day you can just drop your receipts in the appropriate envelope. At the end of the year, pull them out, sort them into categories and total them up. It’s simple and requires the least amount of work.
Open A Separate Bank Account:
This goes hand in hand with setting up a budget. The amount you make varies widely from month to month. Prepare for those short months. Use this account to deposit all the money you make. Pay for you business expenses from this account and set a limit on how much you transfer to your personal account each month when you pay yourself. You’ll also want to use this account as a reserve so that you’ve set aside enough money to make quarterly tax payments. Another nice thing about this is that it helps to keep your business and personal expense separate so they’re easy to track and reconcile.
Budgeting:
You should put yourself on a budget and keep the amount you pay yourself the minimum amount you can live on. I say this because you’re going to have expenses, like taxes and other expense I’ve talked about, coming due at some point. It’s also smart because you can set up a reserve for those tight months. Keep in mind that your self employment taxes will cost you 15.3% of your net income after expense and from there you’ve got federal and state taxes. If you’re making money, you’ll be required to make quarterly payments.To avoid penalities you should pay at least as much as your prior years tax liability was
Estimated Payments:
As mentioned above, you are required to pay at least as much as your prior years tax liability to avoid any penalties. We can guide you in estimating your income next year and make the calculations so you can make quarterly tax payments.You’ll need to make an educated guess on what you expect to make in the coming year. With that information in hand, I can provide you with vouchers for paying them.