As the U.S. tax filing deadline creeps ever closer, real estate agents find themselves in a familiar position — figuring out how to pay as little tax as possible while staying off the radar of the ever-watchful IRS.
To help agents successfully navigate this predicament and the fast-approaching April 17 tax-filing deadline, we compiled a list of the seven most common tax mistakes real estate professionals make.
Review them below so you know the pitfalls to look out for and avoid when it’s time to do your taxes. And, as we know all too well, the time is now.
Many agents will fall on the wrong side of the IRS just because they file late. (Note: The deadline this year is Tuesday, April 17, not the traditional April 15.)
In addition to your 2017 taxes, you are also on the hook for your estimated first quarter tax payment as a self-employed independent contractor. As you well know, these quarterly tax payments are based on your best guess of the taxes you’ll owe in 2018.
Unfortunately, commissions don’t always sync up with quarterly tax payment cycles. And filing your taxes late can lead to interest charges and late payment penalties.
If you find you owe more than expected this year, consider applying for a commission advance from a company like eCommission. Commission advances can be a helpful financial tool to ensure you meet IRS tax-filing deadlines.
Forgetting little (deductible) expenses
A business expense must be both ordinary and necessary to qualify as a deductible expense, according to the IRS. Ordinary expenses are those commonly made in real estate, such as your car payment. A necessary expense is helpful and appropriate for your business but doesn’t have to be essential; for example, coffee or lunch with clients qualify as necessary.
Make sure you record all ordinary and necessary expenses throughout the year, no matter the amount. Even seemingly insignificant costs can add up over time. It helps to keep a running log of these expenses to prevent forgetting any of these little items.
Commissions splits and brokerage fees
Commissions paid to other agents or brokers are often fully deductible as business expenses (make sure to double check with your accountant that your situation applies).
In addition, everything an agent pays to a broker connected to their business is tax deductible. In most cases, these include desk and technology fees, and franchise contributions.
Inconsistent mileage deductions
For many real estate agents, mileage deductions lead to a sizeable tax deduction. In 2017, you can deduct 53.5 cents for every mile you drove your vehicle for work.
To take full advantage of this deduction, make sure you document all the trips you made including the date and reason for the trip. Include the agent standard – driving clients around to view homes – as well as those trips you take for neighborhood research and even the driving you do for continuing education courses!
Going overboard with the home office
It’s something of an urban legend that putting your home office as a deductible expense immediately raises an IRS red flag. That being said, the rules for deducting home office expenses are strict and they’re easy to mess up.
If you’re not using your home office “exclusively and regularly” as your principal place of business, then you’re far better off leaving this expense off your tax filing.
Not deducting commission advances
Because commission advances are used for business purposes, they are considered a tax-deductible business expense. Agents should include an itemized summary with their return detailing all advance fees paid to any commission advance service provider they used in 2017.
If you’re not good with math and filing your taxes on paper, we recommend having somebody go over the numbers again. Tax software or accountants who juggle the numbers for you are a great alternative.
The IRS caught 1,627,646 math errors on income tax returns in 2016. If a math error caused you to pay less tax than you owed, the IRS is likely to ask that you pay the balance owed with interest.
Not correcting a mistake
You sent in your taxes and a couple of weeks later you realize you made a mistake. Sounds familiar, right? But what do you do next? What you should not do is let it pass and hope that this one falls between the cracks. The IRS has a dedicated form 1040X that you can submit to fix your error.
None of the advice above is meant to be construed as tax advice. Your accountant or tax consultant is the best person to give advice on how to avoid errors on your tax return.
Want to learn more about the financial tool that can makes funds readily available to you to meet the IRS deadline? Read about how eCommission can assist you here.