A lot of people, who are real estate agents, come from a background of being an employee of a company. When they were an employee, their company withheld income taxes, from each paycheck. When you become a real estate agent you are totally responsible for all of your withholding.

Many people find the transition from an employee to a self employed agent to be difficult and do not pay their taxes. Soon they do not have the money to pay their taxes, and feel they are in a hopeless situation. Before they know it they are behind many years in filing their tax returns.

If you continue to not file your tax returns, and not pay your taxes, the Internal Revenue Service can confiscate your assets to satisfy your debt. Anything you own can be confiscated, i.e. bank accounts, your home, your car, etc.

If you have found yourself in this situation your first step is find the best tax preparer for real estate agents. The most knowledgeable person, for real estate agents, can look for deductions which will help lower your tax bill. If you owe the government you will owe income taxes, self-employment taxes and penalties and interest.

The next step is to have your tax returns prepared as soon as possible. You need to do this so you will know how much taxes you owe and what steps you can use to pay them.

I recommend you use the spreadsheets on my website to help you accumulate your expenses. The spreadsheets are specifically geared to your expenses as a real estate agent. My website is located at http://agentstaxtips.com/

 Many people mail or email me their information for me to prepare their tax returns. When they mail me their information, I ask they also send me other information. The other information is the spreadsheet they filled out and any other information they feel is pertinent to preparing their taxes. The other information usually includes items such as the mortgage statement of their residence, charitable contributions, rental information, etc.

It is also important for me to have a copy of the last tax return they had prepared. This tax return may have additional information I need to prepare future years plus information to save penalties and interest.

Once I have all of the information I need to start, I begin work on the tax returns. I almost always have many additional questions the purpose of which is to save more taxes. I continue to work with the client until I have exhausted every means possible to save the taxes, penalties and interest they owe.

Once I am done preparing the tax returns, I discuss with the client, whether they have enough money to pay their taxes. If not then I look at different ways for the client to pay what is owed.

If you fall into the first category the first thing you should do is have your tax returns prepared.  After your tax returns are prepared then you’ll know how much you owe and you can work out a payment plan with the IRS.  You’ll want your tax returns prepared by the best preparer possible so that you will owe the least amount of taxes.  Owing the least amount of taxes will result in you having the lowest monthly payments. 

When your tax returns are prepared and you are sure you owe the least amount possible, then you can prepare Form 9465.  Form 9465 is a request to make payments to the IRS.  You should request a monthly payment that you can comfortably live with.

If you fall into the second category and have already sent in your tax return here’s what I would do.  You have three years to amend any tax return you filed.  The three years start running from the date that you originally filed your tax return.    

You should thoroughly review all of your expenses to make sure you have all the expenses you are entitled to.  Any missed expenses would lower the amount of taxes, penalties and interest that you owe.  You need to know all of the expenses you are entitled to.

After you have filed the amended returns I would contact the IRS and request lower payments.  I would also request lower payments if my income had dropped from the time that I originally agreed to make any previous payments until now.

If you are in one of these situations I hope you will have me help you.

Often I hear from real estate agents, who have been successful for a number of years, in selling properties.

They are calling me because they have mismanaged the commissions they received. It is not uncommon to hear that they have a considerable amount of unpaid bills and income taxes.  If you are in this position I assure you that you are certainly not alone.

The new agent cannot be blamed because he or she has come from a job where his or her employer withheld and paid in their taxes. 

Being a self-employed person requires a considerable amount of responsibility.

To avoid this type of problem I recommend real estate agents divide each commission they receive into one-fourths.

One-fourth should be paid into estimated tax payments to pay for your income taxes. See my blog entry on estimated tax payments.

One-fourth can be used for your current real estate expenses, such as promoting yourself.

The other two-fourths can be used for your living expenses.

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

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.

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.

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.

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 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

 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.