10 Steps for agents to get the most from their tax returns
- Preparation and tax code knowledge defines which expenses are permitted in quarterly and year-end taxes.
- Monitoring expenses such as vehicle depreciation and home working spaces can save thousands of dollars, but so can properly recording software costs, marketing expenses and annual membership fees.
- When using rooms or devices for both business and personal use, always keep track of proportions used for each.
Real estate agents spend their own funds and resources everyday to help people find homes. But are your expenses business, personal or something in the grey zone? The answers aren’t always black and white, leading to lost deductions and overpaying the IRS.
A keen eye for deductions goes a long way. Preparation and tax code knowledge will help you understand which expenses are permitted in quarterly and year-end taxes. Follow these steps so you can save money and invest IRS gains back in your business.
Monitor vehicle expenses
You have two choices when using your vehicle for work: standard mileage deduction or tracking all auto-related expenses.
Standard mileage deduction usually benefits those driving 10,000 miles or more for business. The IRS requires a detailed log for mileage claims, which must include the date, time, mileage and purpose of the trip. Mileage tracking apps, which are utilized in QuickBooks Self-Employed, lighten this tedious process by recording a trip’s date, length and time automatically.
If you drive less miles or have high car payments, the actual cost method could yield a higher deduction. This method allows you to deduct that portion of vehicle costs associated with self-employed work, but the deduction must be in proportion to business driving time. You may be able to deduct portions of your car lease payments, auto loan interest, auto insurance, maintenance and repairs, as well.
Designate a home office
A dedicated area to work from home is eligible for a home office deduction even if you have a working space at a brokerage. You can use either a simplified method or regular method when deducting home office expenses. The simplified method maximizes most self-employed deductions, but the regular method tracks actual expenses and may yield higher deductions for larger home offices or expensive homes. Remember, home offices are used exclusively for business purposes, so using half of it to store personal items means you can only claim half the square footage.
The simplified method deducts $5 per square foot and can’t exceed $1,500.
The regular method has no limit on the amount of office space used for business. It’s determined from the percentage of your home used for business. Claiming a home office deduction using the regular method doesn’t stop at the home itself, as portions of mortgage or rent payments, utility costs and homeowners or renters insurance premiums can also be deducted.
Write off desk fees
Desk fees, or the cost of office space charged by a brokerage, are deductible, but claiming desk fees prohibits claiming a home office deduction.
Record marketing and advertising costs
Marketing and advertising are essential to real estate agents, both in selling homes and deducting taxes. The direct cost of promotional items like bench ads, business cards, flyers, magnets and signs can all be written off. Production costs of the items, such as writing and design fees, can also be deducted.
Digital and online advertising costs are now some of the largest agent expenses. Luckily, much of that can be written off. Website design, hosting fees, SEO marketing, pay-per-click advertising, video production and any other tech-related costs should all be tracked as business expenses.
Claim office supplies
Whether claiming a home office or desk fees, you can deduct office-related materials needed to run a business. Everyday purchases like stationery and photocopies can be claimed. Bigger purchases – furniture, technical equipment, computers or telephone and internet bills – can also be claimed in full or depreciated over a number of years. If you have a landline phone solely for business, you can fully deduct the expense. But if you use a cell phone, you may only deduct the business percentage of that expense.
You can fully deduct software needed to run your business, including accounting and lead generation software. Products like CRMs help you manage your clients, while software such as QuickBooks Self-Employed automatically tracks your expenses or mileage – and both may be fully deducted.
Keep track of fees, licenses, memberships and insurance
Annual fees for your state license renewal, professional memberships and MLS dues are a cost of businesses, so they are also deductible. However, the portion of professional membership dues funding political lobbying and advocacy is not deductible, which is outlined by the National Association of Realtors.
General business insurance and errors and omissions insurance are both fully deductible expenses. Real estate taxes necessary for your business are also deductible, but not self-employment taxes.
Record meals and entertainment
Traveling on business or dining with other professionals for the purpose of conducting or generating business allows you to deduct those meals as a business expense. You can deduct 50 percent of the total expense in either case, which includes tax and tip for the meal.
For business entertainment, you are allowed to take the meal deduction only if business was discussed during the meal, or immediately before or after. But if your event is provided to the general public, like a well-advertised open house, you can deduct the entire cost of refreshments and food.
Donating money to a charitable cause isn’t just a service to the community, it’s a marketing platform to grow your brand – and it’s deductible. Real estate agents that donate to housing charities like New Story or make contributions to home-build projects put on by Giveback Homes and Habitat for Humanity receive personalized marketing content in return and are eligible to claim up to 50 percent of their cash donations.
Further education, network and travel
Advancing professional education is crucial to continued success in real estate and a requirement in most states. Many agents and brokers professionally grow and network through coaching, courses, trade shows or conferences, either online or in-person. You may be able to deduct registration costs as well as transportation and accommodation costs if travel is required to attend events or meet with a coach.