Tax Planning Strategies for Real Estate Agents
Whether you are a real estate agent or run a manufacturing company, one of your financial goals is to maximize profits. Effective tax planning can increase profits, save time, and reduce stress. In this article, we will discuss some ideas you can implement today to enhance your tax planning skills and increase profits.
Become More Organized
You may not think of organizing as a way to engage in tax planning, but efficient and effective organization of your accounting and bookkeeping goes far when it comes time to prepare your taxes.
Here are a few ideas to enhance your real estate company’s tax planning:
Utilize cloud-based accounting programs such as QuickBooks and Xero
Create workflows to streamline and standardize common activities, such as payroll, invoicing clients, and recording payments
Set time aside daily or weekly to update records
Designate an area to store important documents such as receipts and company files.
These are all things you can do today to increase the efficiency and effectiveness of your real estate company’s accounting department. When tax season arrives, all your records will be current and accurate, saving time and avoiding possible errors when preparing and filing taxes.
Separate Business and Personal Expenses
One of the best and easiest tax planning strategies is to make sure you separate business and personal expenses. This means adding separate business and credit card accounts for business related expenses.
Separating business and personal expenses will make it much easier to calculate qualified deductions, and helps avoid errors such as including a personal expense as a business expense.
Utilize Deductions
As a busy real estate agent, you likely make use of equipment such as laptops and copiers, and rent or have a home office to conduct business. These are all potential business deductions you can use to reduce your tax bill.
As an overall rule, expenses must be “ordinary and necessary” to qualify as a business deduction. Ordinary means it is in use by similar businesses as yours, and necessary means it helps your business earn money.
Common Deductions
Business Equipment
Suppose you buy a laptop to use solely for use in your real estate business. The cost of the laptop qualifies as a business expense that is deductible over the laptop’s useful life (usually five years). If your laptop has a cost of $1,500, this amounts to a $300 tax deduction each year.
Business Mileage
Business mileage is another valuable deduction and tax planning tool real estate agents can utilize. Business mileage encompasses all mileage driven from your principal place of business for business purposes. It is important to note that the miles commuting to your real estate office do not qualify.
The IRS allows a 58.5 cent deduction for each qualifying business mile, so the deduction can be substantial. Meticulous documentation is key, and apps such as MileIQ are available and convenient to track your business miles.
Continuing Education Expenses
As a real estate agent there are several educational costs that are deductible. The cost to obtain and renew your business license is deductible, as well as education and training to enhance your career. In sum, any expenses related to your real estate career is likely deductible.
Contribute to Retirement Funds
You may not think of retirement planning as an effective tax planning strategy, but utilizing the various tax benefits of funding your retirement account is a great way to reduce your tax bill.
For example, if you work as a real estate agent and your employer offers a 401(k) plan, your contributions to the plan will be tax exempt.
There are many retirement plans to choose from, each with their own tax benefits.
It is important to consult a tax professional to properly maximize your tax benefits, but the overall theme of maximizing contributions to retirement accounts is an exceptionally effective tax planning strategy.
Form an S Corporation
Many real estate agents do not form separate companies for their business, which means they are self-employed for tax purposes. This means that any income earned from the business is subject to self employment taxes, which can be significant.
Income from an S corporation can be divided into salary and distributions. In this case, only the salary portion of your income is subject to the self-employment tax, which can lead to additional tax savings.
It is important to note that the IRS has rules regarding the appropriate amount of salary you must take under an S corporation. Your tax professional can provide you with concrete guidelines on how best to use this tax planning strategy.
Summary
We hope this short article is helpful when determining which tax planning strategies are best suited for your estate business. Effective tax planning can greatly reduce stress, increase profits, and lead to better business performance.
