Are you ready for tax time? Did you know that most tax-planning strategies need to be implemented before year-end? Instead of pushing your tax preparation until after the holidays, consider taking a proactive approach to maximize your savings.
In this article, we’ll outline six tax-planning strategies real estate agents should consider using before year-end. If you have any questions about how to leverage these strategies, reach out to your tax professional.
#1 – Purchase a Vehicle for Special Depreciation Deductions
At the end of the year, vehicle manufacturers are getting ready to release models for the next year. In addition, salesmen are trying to finish the year off strong by closing a few more deals. This makes it the perfect time to purchase a new car. Real estate agents who use their personal vehicles to travel to client meetings, showings, and events can deduct a portion of the vehicle’s cost, maintenance, and expenses.
However, to use special depreciation options, like Section 179 and Bonus, the vehicle needs to be placed in service before the end of the year, meaning you are cruising along the highway by December 31. Although the amount you can expense in the first year will be dependent on your taxable income, the vehicle’s gross weight, and the purchase price, you are able to take a lower deduction than normal, making it a great planning strategy.
#2 – Start Using Giveaway Marketing Strategies
A recent advertising strategy that has been circling around the real estate world is giveaway marketing. In this strategy, you give away promotions and prizes to increase brand awareness and visibility. For example, entering individuals into a contest for a free gift card when they “like” and “share” your post. Other examples include welcome home gift packages, personalized drinkware, keychains, custom pens, and swag bags.
The prizes and promotions given away are tax-deductible. If you are planning on taking advantage of giveaway marketing, do so before year-end to lower your taxable income. Not to mention that the holidays are the perfect time to run these contests!
#3 – Finalize Mileage Logs
Bouncing back to vehicle deductions, mileage logs should be put together before year-end. A mileage log is a listing of where you traveled during the year, including the reason for the travel, the date, and the miles traveled. If the IRS were to audit your travel expenses, they would ask for a mileage log to substantiate your deduction.
If you can’t backdate your travel, start tracking your mileage now. There are plenty of apps available that help you track mileage, including QuickBooks, Stride, Hurdlr, and MileIQ. Your mileage log doesn’t need to be complex. Writing down a few words about your travel will be sufficient. Remember, if you take mileage, you can’t take other expenses, like gas, maintenance, and insurance. The IRS only lets you take one deduction, so be sure you know which method is most beneficial for your situation.
#4 – Consider Your Entity Structure
Your entity structure plays a major role in the taxes you pay. When most real estate agents start out, they file on Schedule C of the individual tax return, subjecting all net profits to ordinary and self-employment taxes. As you begin to grow, this structure might not be the most tax advantageous compared to an S Corporation.
When should you convert? Although the ideal conversion time will differ for each agent, increasing profits can indicate it’s time to consider converting. However, S Corporation owners are required to take reasonable compensation. Although you won’t be able to fully eliminate self-employment taxes, you can reduce them with an S Corp conversion.
#5 – Time Your Income and Expenses
Schedule C filers and cash basis S Corporations have the ability to time income and expenses to maximize tax savings. When the cash basis of accounting is used, income and expenses are only recognized when cash leaves your bank account. This means that if a commission check was paid on December 31 but not cashed until January 1, that income would not be included in your income for the tax year.
The same is true for expenses. If the payment doesn’t clear your bank account, it does not impact your tax situation. At year-end, expedite expenses and delay reporting income. This allows you to defer taxable income until the next year. Do you have any expenses related to January that you can pay in December? How about waiting to cash your commission check until the start of the year? Timing income and expenses can have a profound impact on your tax situation, but only if action is taken before year-end.
It’s also important to note that the gross income reported on Schedule C will not always match the 1099 received. This is because there can be delays between when a company issues a payment and when you receive the funds. For simplicity, some real estate agents choose to report income based on 1099s received. However, if you plan on timing income, be sure you are keeping adequate records to avoid misreporting income in future years. In addition, if you don’t have clear internal records, such as financial statements in QuickBooks, you might want to avoid this method. Pro Tip – This is where a bookkeeper comes in handy!
#6 – Ensure All Expenses are Accounted For
As simple as it may sound, go through your accounting records to make sure all expenses are accounted for. Did you make any payments out of your personal accounts that you forgot to add to your accounting system? If you don’t want to sift through all of your bank and credit card statements, take a look at your average monthly expenses.
How do your expenses compare to the income received? If you notice that expenses are very low in one month compared to your gross income, it could indicate you are missing expenses. Take a deep dive into what transactions might be missing and track down support before year-end.
Moreover, if you are behind on your accounting, now is the time to catch up. All reconciliations and adjustments should be up to date. Don’t wait until the year ends to try and remember transactions from a year ago!
Summary
Which of these tax planning strategies sounds beneficial for your business? Remember, the most effective tax plans draw in numerous planning strategies to minimize your tax bill. For more personalized solutions or help catching up on your accounting records, reach out today to schedule your free consultation. We want to make your next filing season as painless as possible!