While many parts of the economy have seen a massive slow-down because of the Coronavirus pandemic, the Washington, DC-area real estate market has hardly faltered. If you are a local real estate agent, chances are you are busier than ever. Don’t let your busy routine keep you from planning strategically for tax season, however. The following are three mistakes real estate agents should look to avoid:
- Not having a system to collect your deductions
Real estate agents hustle more than almost any other profession. In the morning, you might work on promotional materials in the office; then show houses to prospective buyers in the afternoon; and then attend a networking event in the evening. That’s a full day with many potential business deductions.First, consider mileage. Tracking mileage no longer involves paper logs, which would often end up washed out in a pocket that had gone through the laundry. These days, try downloading a GPS-aware app. on your phone that can track your every trip.
Second, concentrate business expenses on one or two credit cards used exclusively for business. Spreading purchases over multiple business and personal cards makes tax time a nightmare. With only one or two sources to review, getting ready for your tax returns becomes a breeze.
Finally, keep your business receipts in one file folder. Once you accumulate a few receipts, scan and save them in a dedicated file on your computer. Or, if that is too much of a bother, put them all in one manila folder and scan them in a batch later – or not. Having all of your receipts together in one place means, at tax time, you aren’t looking in drawers all over the house for that $500 computer purchase from Best Buy.
- Not considering business entity
Are you operating as a sole proprietor? That may be just fine for you if you’re just getting started in real estate. However, once you approach $100K of gross commissions, you should consider other alternatives.For example, an S corporation could save you some money on Medicare taxes. However, there are many things to consider in this decision, including the hassle of payroll, payroll taxes, and taking a salary. That is a lot of paperwork.
Under the new tax law, a 20 percent pass-through deduction may be limited under an S corporation. On the other hand, it might be increased depending on your personal (and spouse’s) tax situation. There is a right answer for you. Choose an excellent tax advisor, like the professionals at Stitely & Karstetter, who specialize in entity selection issues.
- Not considering pension plan alternatives
There are three main pension plan alternatives for real estate agents. Many agents choose SEP plans, which allow you to contribute up to 25% of your profits. However, that may not be the best choice anymore.If you are working hard at tax planning, getting your taxable profit down to a low number limits your pension contribution. You can contribute and deduct a larger pension contribution using a solo 401(k) plan. The solo 401(k) plan has become the “go to” plan for real estate agents, because you can structure a tax efficient entity and still save a lot of money for retirement.
Finally, if you’re really killing it year after year, the traditional benefit pension plan might be right for you. These plans give you the largest possible pension contribution, but lock you into large contributions over a number of years. These plans aren’t as popular anymore, but may fit some circumstances, such as an agent with a high income spouse.
As a real estate agent, you know the unique challenges and extreme pressure this highly changeable industry can bring. This is why selecting a reputable CPA firm like S&K – who can structure a tax plan to meet your individual needs – is extremely important.