- Form an LLC and file as an S Corp.
- Create a SEP (simplified employee pension).
- Work with a great accountant.
This year, taxes for individual agents like yourself are due on April 18.
Many of us still haven’t filed. But now that April is just around the corner, it’s time to get your paperwork together and finally sit down with those taxes.
To help you complete your taxes in the least stressful way possible, we asked top agents their advice on how you can get your real estate business documents in order and reduce your tax bill as much as possible. And even if you have already filed for 2016, these tips will still be useful information that you can leverage for next year’s taxes.
1. Form an LLC and file as an S Corp.
Bret Lamperes, owner of The Lamperes Team in Northern Colorado, started his realty team with three agents to do $16 million in their first year in a small market.
Now, his team has grown to 10 agents and business is booming. Lamperes offers some excellent advice to agents: He suggests that every agent should form an LLC and file as an S Corp. Although this may sound complicated, in reality, it’s no more difficult than filing two IRS forms (8832 and 2553).
So what are the advantages of this approach? Generally speaking, you get the simplicity of an LLC with the tax benefits of a S Corp.
As an LLC, you get limited liability protection, meaning that none of your personal assets are at risk. Additionally, you’re taxed only once: your income is taxed at your personal rate.
An LLC means you will have fewer filings, lower start-up costs, no mandatory meetings and minimal record keeping requirements. But what about the benefits of an S Corp, you’re asking?
An S Corp. structure requires owners to pay themselves a “reasonable salary” (so you can’t pay yourself $1), which is subject to both income tax at your personal rate and the 15.3 percent self-employment tax that entrepreneurs face.
The caveat is that beyond a “reasonable salary,” owners can distribute excess earnings in the form of dividends — which are taxed at only 15 percent to 20 percent! This is a huge tax advantage for savvy agents.
2. Create a SEP (simplified employee pension)
Patricia Linson, part of Hali’s Angels team in Las Vegas, Nevada, closed 35 transactions last year. Not only is Linson successful at what she does, but she’s also managed to optimize her life to suit her particular goals.
She gave herself a comprehensive financial education so she could retire earlier, travel the world and spend more time focusing on her passion: coaching teens to help reach their life goals.
Based on her experience, Linson believes that all agents should create an SEP (simplified employee pension). An SEP allows business owners to get the tax advantages of an IRA, but with a much higher contribution limit.
Indeed, you can contribute roughly 10 times more to a SEP than a traditional IRA — and write the entire contribution off as a business expense. Your contribution limit is capped at either 25 percent of your annual income (determined on Schedule C if you’re a business owner, such as a real estate agent) or $53,000 for 2016/$54,000 for 2017, whichever is less.
For example, if you had $200,000 in income, after expenses, in 2016, you could contribute up to $50,000 toward your SEP. However, if your taxable income was $250,000, you could only contribute $53,000, even though 25 percent of that is $62,500.
An SEP could save you $10,000 to $20,000 in taxes, depending on your rate and income. You can even still create a SEP for last year and write it off on your tax return.
3. Work with a great accountant
Thai Nguyen raises two kids while her husband travels for work during the week. Last year, Nguyen did $13 million in sales with her two assistants. This year, her goal is $25 million in sales, while also expanding her business to include new construction.
She argues the importance of working with a smart accountant. “Work with a great tax accountant that has full access to your business account. They provide a Profit & Loss Statement every month and allows to you see what you are spending your money on, how much income you’re making and if you are profitable.”
In addition to working with an accountant, Nguyen also utilizes technology to track her income and taxes.
As you have learned from these top agents, even this late in the game, there’s still time to set up tax-advantaged accounts, like an SEP. And even if you’ve already filed this year, these are some great tips that can help you save money on next year’s taxes.
Aaron Lesher, CPA, is part of the Customer Success and Growth team at Hurdlr, the developer of ProfitDash, in Washington, D.C. Aaron also helped create a free tax resource for self-employed entrepreneurs called 99Deductions. Follow Aaron on Twitter or connect with him on LinkedIn.