Taxes are complicated. As a result, lots of people are not fully informed when it comes to tax deductions. Here are three common misconceptions that can cost real estate professionals dearly:
1. You must pay cash to get a deduction
When you buy stuff for your business, such as a computer or automobile, the cost is deductible through depreciation or expensing.
Some people are confused about what constitutes "cost" for tax purposes when a purchase is financed. This includes not only the purchase price, but also sales tax, delivery charges, installation and testing fees, if any.
You may depreciate the entire cost, no matter how you paid for the property — in cash, with a credit card, or with a bank loan.
2. You must have a home office to deduct business property in your home
Many business owners believe that they can’t deduct any expenses they incur while working at home unless they qualify for the home-office deduction. This is a myth that has cost many taxpayers valuable deductions.
Even if you don’t qualify for or take the home-office deduction, you can still obtain tax deductions for various expenses you incur while doing business at home. These include:
Telephone expenses. You can’t deduct the basic cost of a single telephone line into your home, but you can deduct the cost of long-distance business calls and special phone services that you use for your business (such as call waiting or message center).
You can also deduct the entire cost of a second phone line that you use just for business, including a cell phone.
Business equipment and furniture. The cost of office furniture, copiers, fax machines, and other personal property you use for your business and keep at home is deductible, whether or not you qualify for the home-office deduction.
These items can be expensed (deducted in one year) under Section 179 or depreciated. If you’re a sole proprietor, these costs are deducted directly on the Schedule C form: Profit or Loss From Business.
You don’t have to list them on the special tax form used for the home-office deduction. If you use the property for both business and personal reasons, the Internal Revenue Service requires you to keep records showing when the item was used for business or personal reasons — for example, a diary or log with the dates, times and reasons the item was used.
3. You can’t deduct auto-loan interest if you use the standard mileage rate
Many real estate professionals who use their cars for business choose to deduct their car expenses by using the standard mileage rate. With this method you deduct a specified number of cents for every business mile you drive.
The IRS sets the standard mileage rate each year. Usually there is just one rate for the entire year, but 2011 is different. The standard mileage rate is 51 cents per mile for the first six months of 2011 and 55.5 cents per mile for the last six months.
If you choose the standard mileage rate, you cannot deduct actual car operating expenses — for example, maintenance and repairs, gasoline and its taxes, oil, insurance, and vehicle registration fees.
All of these items are factored into the rate set by the IRS. And you can’t deduct the cost of the car through depreciation or Section 179 expensing, because the car’s depreciation is also factored into the standard mileage rate (as are lease payments for a leased car).
However, you can deduct interest you pay for a car loan. Unfortunately, many people fail to deduct it because of confusion about the tax law.
Taxpayers are not allowed to deduct interest on a loan for a car that is for personal use, so many people believe they also can’t deduct interest on a business car. This is not the case. You may deduct interest on a loan for a car you use in your business.
But there is one exception: If you’re an employee, you may not deduct interest on a car loan even if you use the car 100 percent for your job.
If you use your car for both business and personal trips, you can deduct only the business-use percentage of interest and taxes.
Example: Ralph uses his car half of the time for his real estate agent business and half of the time for personal trips. He uses the standard mileage rate to deduct his car expenses. He pays $3,000 a year in interest on his car loan.
He may deduct 50 percent of this amount, or $1,500, as a business operating expense in addition to his business mileage deduction.
Stephen Fishman is a tax expert, attorney and author who has published 18 books, including "Working for Yourself: Law & Taxes for Contractors, Freelancers and Consultants," "Deduct It," "Working as an Independent Contractor," and "Working with Independent Contractors." He welcomes your questions for this weekly column.