Tax & Financial Tips for Real Estate Agents

Estimated tax payments are advance payments for your Federal income taxes. 

When you are an employee your employer sends in your income and social security taxes for you.  Self-employed individuals, such as real estate agents, are responsible for making their own payments.

You have to make quarterly estimated tax payments during 2012 if your estimated tax liability, after accounting for withholding taxes, is $1,000 or more.

To be on the safe side all of your tax payments, made for 2012, should be at least 100% of Line 61 on your 2011 Form 1040.

Failure to pay a required estimated tax installment will subject you to a penalty based on the prevailing IRS interest rate applied to tax deficiencies.

Due dates for estimated tax payments in 2012 are April 17, June 15, September 17 and January 15, 2013.

If you are a new agent consider setting aside, in a separate savings account, 25% of each commission you receive to pay for your income taxes.

Here is a link to more information on estimated tax payments:

http://www.irs.gov/pub/irs-pdf/f1040es.pdf

If your tax preparer does not specialize in real estate agents they may cost you plenty.

There are three areas where you could be paying more in taxes or receiving less of a refund.  These critical areas are in taxes, penalties and interest, and audits.

The tax rates for 2011 tax returns; are 10%, 15%, 25%, 28%, 33% and 35%.  Real estate agents are also affected by the self-employment tax, which is 13.3%.

How would you be affected, if a tax preparer does not know all of the deductions, applicable to real estate agents?  Let’s look at an example.  We will assume you are an average taxpayer in the 28% tax bracket.  We would also add on the 13.3% self-employment tax.  Your combined taxes would be 41.3%.

For every $100 in deductions, a preparer misses; it would cost you $41.30.  Too many missed deductions may add up to a hefty amount of money!

The next area for you to be concerned about is the areas of penalties and interest.  There are many different types of penalties and interest. The general rule here is avoiding mistakes will save you penalties and interest.     

Finally, a tax preparer that specializes in real estate agents can save you money in the area of tax audits.

People are usually selected for a tax audit by computer analysis.  The IRS computers compare average expenses for each type of profession.  If your expenses are out of line in comparison with other real estate agents your chances of being audited are more likely.

Here is an example.  Let’s say on average real estate agents, with gross commissions of $50,000, have office expenses of $2,500.  You have gross commissions of $50,000, but you report office expenses of $15,000.  This is red flag on your tax return. 

Although you do not want to raise any red flags on your return, you also do not want to cheat yourself out of any deductions you are entitled to.  A tax preparer, who specializes in real estate agents, should have a good feel for a proper balance.

If you had a bad year in your real estate business this blog entry may put a smile on your face and money in your wallet.

As we all know, even though we may try as hard as we can, many real estate agents are not successful in selling properties.  When this happens there is very often a tendency to not keep track of all of their expenses associated with their real estate activities.

If this is your situation let me advise you it is more important than ever to keep track of all of your expenses because it could mean some really big tax refunds for you.

When you have a loss in your business you may have incurred what is known as a net operating loss.

 If a 2011 loss exceeds income, the excess may be first carried back to 2010 and 2009 and then carried forward for 20 years until it is used up.  This means your loss could be used to either get you refunds on tax paid in the past two years or used to reduce taxes paid in the next 20 years.

If it is advantageous to your particular tax situation you may want to relinquish the carry back and make an election to carry your loss forward to future years.

You will generally make the election to relinquish the carry back if you expect greater tax savings by carrying the loss forward.  That is you expect to make more money in the future and be in a higher income tax bracket.

You might also make the election if you are concerned you might be audited for earlier years if you carry back a loss for a refund. 

You make the election by attaching a statement to this effect to your return for the year of the loss, which is filed by the due date plus extensions.  The IRS refuses to allow a late election and received court approval for its position.

Over my thirty-three years of preparing tax returns I have used this technique to save my clients hundreds of thousands of dollars in income taxes.  I cannot tell you want a relief it has been for clients who owe $50,000 to have me pull an old NOL out that has been carried forward and show them they actually owe nothing.

This blog segment goes into depth about the expenses connected with the business use of your car so you do not miss any of these valuable deductions.

If you use your car for business purposes, you can deduct car expenses.  You generally can use one of two methods to figure your deductible expenses: actual expenses or the standard mileage rate.

You may be able to use the standard mileage rate to figure the deductible costs of operating you car for business purposes.  The 2011 rate for business miles is 51 cents per mile from January 1 to June 30 and 55 ½ cents per mile from July 1 through December 31.

If you want to use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business.  Then in later years, you can choose to use either the standard mileage rate or actual expenses.

In addition to using the standard mileage rate, you can deduct any business–related parking fees and tolls.

If you do not use the standard mileage rate, you can deduct your actual car expenses.

For clients who qualify I figure your deduction both ways to see which one gives you a larger deduction.

Actual car expenses include the costs of:

Depreciation

Garage rent

Gas

Insurance

Lease payments

Interest payments

Licenses

Oil

Parking fees

Registration fees

Repairs

Tires

Tolls

Car Washes

I advise my clients to keep the actual receipts for all of their vehicle expenses and the actual mileage they drove during the year.

At the beginning and end of the year you can jot down the mileage of your car.  With the actual expenses and actual mileage I can compare which method will save you the most money.

The IRS would also like for you to keep a log of each of your business trips. The log would include the mileage of each business trip, the date, the names of the people involved and the purpose of the trip.

The amount of deduction for actual expenses depends on the percentage you use your vehicle for business. 

For example, let’s say you drove 20,000 miles last year and 16,000 miles was for business.  Therefore, 80% (16,000/20,000 = 80%) was for business.  If you incurred $10,000 expenses on your car you can deduct $8,000 as a business expense.

 Let’s use this same example, of 80% business use, to look at a standard mileage allowance deduction.

From January 1^st through June 30^th you drove 7,500 miles and from July 1^st through December 31^st you drove 8,500 miles Using the standard mileage rate your deduction would be 7,500 miles X 51 cents per mile = $3,825.00 plus 8,500 miles X 55.5 cents per mile = $4,717.50. The total mileage expense, using the standard mileage rate, would be $8,542.50.

Comparing the standard mileage rate deduction of $8,542.50 with the actual expenses deduction of $8,000, we would choose the standard mileage rate expense deduction because it is larger and would save you more money on your tax return.

Your business expenses are an important consideration because not only do they affect your income taxes, but also your self-employment taxes. You need to make sure you are accounting for every business expense so you don’t overpay your taxes.

In this segment I will continue with tips on how you can best manage your money, take the most deductions legally possible and avoid being audited. 

An important area for you to take advantage of is your cash receipts for your expenses.  Here is an example of a cash receipt for an expense—you stop for $15 worth of gas and get a receipt. 

Often, when I first meet agents, they tell me they have not kept track of their cash receipts for expenditures.

Sometimes people say they forgot to ask for a receipt, sometimes they say they did not feel comfortable in asking for a receipt.

It is important to keep in mind that every receipt you get is worth big bucks to you. 

Depending on your tax bracket each cash receipt is worth from 25% to 50% of the expenditure you incurred.  Let’s say you spent $100 for a business expense.  The receipt is worth from $25 to $50 in tax savings to you.

Imagine how many thousands of dollars, each year, all of your cash receipts can add up to in tax savings.

Should you get every receipt you possibly can?  You betcha’.

What type of cash receipts should you be on the lookout for?  The answer to that is everything you believe may be related to your business. 

If you are ever not sure if an expense is deductible save it for your tax preparer to decide.  Just put a question mark on the receipt and when you have your taxes prepared give those questionable receipts to your preparer.  If in doubt do NOT throw out the receipt, it could be worth money to you.

 You can deduct all of the costs of running your business.  These costs are known as business expenses.

To be deductible, a business expense must be both ordinary and necessary.  An ordinary expense is one that is common and accepted in your field of business.  An example of this would be expenses incurred in connection with holding a broker’s open.

A necessary expense is one that is helpful and appropriate for your business.  An example of this would be the purchase of business cards.  An expense does not have to be indispensable to be considered necessary.

There are two types of expenses—expenses fully deductible in the current year and capital expenses.  Capital expenses are generally for items such as equipment. 

For capital expenses, you may have to take a portion of the expense over a number of years.  This is referred to as depreciating the asset.

An example, of this is the purchase of a computer.  Normally you would have to take a percentage of the computer’s costs over a number of years.

There is a section in the Internal Revenue Code which allows you to choose between depreciating the asset or deducting all of the expense in the current year. 

In preparing my clients’ tax returns I analyze the effect of each of these two methods to see which approach is more beneficial for my client.

The goal of every taxpayer should be to pay the least amount of taxes possible.  I do not pay a penny more than I absolutely have to and neither should you.

The way you present your financial information to the IRS, on your tax return, can save you big money.  The name of the accounts you use and the amounts contained in those accounts can save you thousands of dollars in taxes.

Knowing what to name expense accounts and how much amounts should be shown in those accounts is an art I have learned in preparing tax returns for the past 33 years.

Let’s look at an example of what I am talking about.  Let’s say our example real estate agent gives his clients gifts when he sells a house.  This year was a very good year for him and he gave $5,000 in gifts.

I feel that if he put $5,000, under the expense account “gifts”, on his tax return he would have a higher probability of being audited.  My experience with real estate agents’ tax returns leads me to believe that if this agent split this $5,000 into different accounts, such as business promotion, advertising, etc. his chances of being audited would be greatly reduced.  

In preparing tax returns I do my best to get to know my clients personally and their motivations.  In this example, I know my client purchased these gifts to promote his business and for advertising purposes.

A key to maximizing your deductions, while avoiding a tax audit, is to break down your expenses into subcategories.  What your tax preparer has not been telling you could have been costing you deductions and putting you at additional risk of an audit.

Let’s now look at a custom set of accounts for you the real estate agent.  This is not an all exhaustive list.  When you set up your own list of accounts you can add more if you think they are merited.  Remember though we don’t want to put our expenses into too few accounts or that may increase your risk of an audit.

SAMPLE REAL ESTATE AGENT’S CHART OF ACCOUNTS

(This list is not all inclusive. The Chart of Accounts on my website is: http://agentstaxtips.com)

INCOME

Commissions Received

Referral Fees Received

Interest Income

EXPENSES

Advertising

Auto Expense—AAA

Auto Expense– Car Wash

Auto Expense—Gasoline

Auto Expense—Insurance

Auto Expense—License

Auto Expense—Maintenance

Auto Expense—Parking

Auto Expense—Repairs

Auto Expense—Tires

Bank Charges

Books and Journals

Brokers Opens

Copies

Draws

Dues

Education

Entertainment

Federal Income Taxes

Ferries

Freight

Garbage

Insurance

Licenses and Fees

Meetings and Seminars

Memberships

MLS Fees

Office Expenses

Professional Fees

Client Reimbursements

Storage Rent

Supplies

Telephone

Travel

Web Site

Real Estate Agents often ask me what is the best way for them to save on their income taxes. Without question the one best way for you to save on your taxes is to keep the best records of your business activities you possibly can.

 When most agents have me prepare their tax return they do not have a clue as to how they should keep records to maximize their deductions. No other tax preparer or financial advisor has ever taken the time to help them in this most important area.

 I am going to give your free advice which will be worth thousands of dollars, each year, for the rest of your business career. By not overlooking deductions you will be putting thousands of dollars in your pocket each year.

 The first consideration for you will be to pick a software program to keep track of your business income and expenses. This software should be easy for you to learn and use.

 There are many such programs for you to choose from. I usually suggest Quicken and will use that in my examples.

 It is important for you to note here that you will be thinking about two types of expenses – cash and checks.

You will want to create separate accounting records just for your real estate activities. Let me now guide you through setting up your Quicken records.

Quicken should self install itself for you or some computers come with Quicken already installed on it when you purchased it.

Across the top of your Quicken screen you will see File, Edit, Finances, etc. Choose File, then new, then new Quicken File. Don’t choose new Quicken account just yet. Give the File a name such as Real Estate.

Now choose the type of account for Quicken to create. Choose checking.

I recommend you have a separate checking account for your real estate activities. You can get free checking accounts at some banks or credit unions.

Now Quicken will ask you a series of questions, such as, do you have your last statement for this checking account. If you are opening up a new, separate checking just for real estate your answer will be no. 

You should be done at this point and have created a checking account in Quicken.

You will also want to create a separate account to keep track of your cash expenditures. Go back to the top of Quicken where you will see File, Edit, Finances, etc. Choose New. Quicken will ask you if you want a new file or new account. This time choose new Quicken account. Then choose cash under Banking and Cash. Quicken will ask how much cash you have. You can put no.

The purpose of the checking account is to keep track of your checking transactions. The purpose of your cash account is to keep track of your cash transactions.

When I first meet someone I like to know a little bit about their background. Therefore, before you start reading my blog you may be interested in my background.

I was born and spent the first 28 years of my life in Richmond, California. I have also lived in San Diego and North Idaho. I moved to Washington State in 1991. I have 33 years of experience as an Accountant. I have a BS in Accounting and an MBA in Accounting from California State University, East Bay. I am licensed in Washington State as a Certified Public Accountant. I am also licensed by the California Board of Accountancy to practice public accountancy.

 • After graduation from college I worked for a financial services firm in Oakland, California. The firm was comprised of CPAs and attorneys. I was in charge of all financial needs for 25 businesses. Duties were preparation of financial statements, income tax and sales tax returns, obtaining business licenses and giving tax and operational advice to the businesses. I also prepared payroll and payroll reports for my clients. The job entailed extensive use of RIA and CCH references for tax research. Clients ranged from medical groups, delicatessen chains, transmission repair chains and many others. I was employed with this company for 3 ½ years.

 • In 1983 I opened my own CPA firm in Vacaville, California. My clients required me to prepare financial statements for their companies, as well as every type of tax return (1040, 1065, 1041, 1120 and 1120S) along with state returns. Clients also needed payroll, payroll reports and sales tax returns. My duties required tax research and advice on a wide variety of topics. As a result of close proximity to Travis Air Force Base I prepared tax returns for many states due to the relocations, both civilian and military. In addition to my initial office, I opened two more offices in Fairfield and Walnut Creek, California with a total of nine employees at these offices.

• In 1992 I had an opportunity to purchase a CPA practice in Friday Harbor, Washington. Friday Harbor is located in the San Juan Islands of Washington State. Duties remained consistent with the types of work I had been performing in Vacaville, but with many more clients.

• In 2001 I relocated my firm to offices in Bothell and Bellevue, Washington. In 2009 I noticed my clients preferred to either email or mail me their information. The clients said they found these methods much more convenient for them. Therefore, I closed my offices in Bothell and Bellevue and provide my services through email, faxes and the mail.

• Over the years the majority of my clients have come to be real estate agents and their clients. In 1983, my first client was the owner of a Century 21 office. He is still my client today. Therefore, for quite some time I have specialized in preparing tax returns for real estate agents.

• I received so many requests for tax advice from real estate agents that I authored a book – “Tax & Financial Tips for Real Estate Agents.” I used ecommerce solutions to promote the book and it has sold in all 50 states. I am continually called on to provide advice concerning a wide variety of tax questions, preparation and advice, both locally and in other states.

• I am also a retired Real Estate Agent.

Check out my website: http://agentstaxtips.com