Get All Your Ducks in a Row: It's Tax Time! Now’s the time to get ready to do your 2006 taxes, and to implement a few strategies to help ease the pain of your 2007 obligations.
Janice Presby has a pretty good handle on her federal taxes and credits a relationship formed in 1988 with helping her get there. As broker and co-owner of Century 21 Act I Realty in St. Cloud, she actively listed and sold property for 19 years before becoming a non-selling broker about two years ago. During that time, she’s seen a lot of sales associates get bogged down by tax-filing and payment obligations, but says her financial planner has kept her from floundering.
“One of the best pieces of advice he gave me was to invest money in bond ladders,” says Presby, who in 1988 began purchasing bond funds on a tax-free basis, and then holding them until they matured in 10 years. “I’m 60 years old now, and I have bond ladders that will sustain me until I’m 77.”
On the tax front, Presby meets quarterly with her financial planner to go over her business income and expenses, set expectations for the coming quarter, put money aside for her SEP-IRA retirement account and allocate a portion of her income for tax payments. Presby does all her bookkeeping by hand, and the planner funnels it into an automated program to come up with the numbers.
Like many brokers, Presby sometimes gets hung up on the quarterly estimated payments that Schedule C filers are required to send in to the IRS. “On that issue, I would say, ‘Do as I say, not as I do,’” says Presby, who pays her estimated taxes on an annual basis every January. “The good thing is that once I’ve funded my SEP-IRA and other investment accounts, my penalties [for late payment of estimated taxes] come in at a manageable $150 or $160.” Not Rocket Science
Aside from the way she handles estimated tax payments, Presby falls into the category of real estate professionals who don’t cringe when they hear the word taxes. Unfortunately, for every Presby, there are many sales associates and brokers nationwide who do. For those of you who need a little push in this area, we write this annual article to help you get on track with advice from experts and real estate professionals, like Presby, who have the tax process down to a science.
As sole proprietors, sales associates face unusual challenges when it comes to taxes. Even though they have a “boss” (the broker), a desk and an office, they are essentially small-business owners and, as such, must treat their practice like a business. So no matter how many office lunch parties you attend, caravans you go on, colleagues or Association meetings you attend, you still stand alone in the eyes of the IRS.
Too many real estate professionals forget about this until just before filing deadlines, says Ed Godoy, partner in charge of the BDO Seidman’s tax practice in Miami. “They don’t think about taxes or financial planning until the day they’re ready to prepare or file their return,” says Godoy, who points out that sales associates can avoid the last-minute scramble by using year-round planning tactics. “As a result, they wind up losing deductions and making mistakes, like not setting up qualified retirement plans.” Get Organized
Getting organized can be as simple as sitting down once a quarter and at the end of the year to see how much income you have generated, how much (usually 20 to 30 percent) of it should be allocated to estimated tax payments, how much can be funneled into a tax-free retirement account and/or how much can feasibly be allocated to business expenses like marketing materials, advertising tools and new technology.
To get there, you should use an automated program like Quicken, QuickBooks or Peachtree, all of which can help discipline sole proprietors to enter income and expenses that in turn can be used to generate profit and loss reports and other valuable data (See Technology and You, page 18.)
“Really, anything is better than the shoebox method,” says Godoy, who adds that most of today’s automated programs include tax-planning software that allows users to quickly transfer their data into a tax-calculation program.
Keith Sequeira, a financial advisor with Wachovia Securities in Red Bank, N.J., says sales associates who want to avoid tax-related stress should devise a systematic, year-round way of organizing their finances. When a commission check comes in, for example, understand that 30 to 35 percent of it will be lopped off the top for Uncle Sam. Using a spreadsheet like Microsoft Excel, you can take a $10,000 commission check and apply ballpark percentages for expenses, taxes and IRA or retirement fund contributions to come up with a net spending amount (the money left over for you to live on).
“If [they] use a spreadsheet for every closing, [sales associates] can get a good view of exactly what they’ll owe in taxes, what their expenses are and what’s left over,” says Sequeira. “The latter is the amount that the [sales associates] should be looking to blow on whatever it is they wish to blow it on.” From the Trenches
Dan Gullahorn, broker-owner at Century 21 AmeriSouth Realty in Pensacola, has honed his tax strategy over the last six years and says he’s ready when April's filing deadline rolls around. His 16 sales associates aren’t quite there yet. “They get caught up in getting sizable commission checks and either spending them on personal items or reinvesting [them] in their businesses,” says Gullahorn. “When tax time comes around, they realize that they haven’t put away the money that they should have.”
Gullahorn, who lists and sells property, uses QuickBooks and TurboTax software to handle his own finances and those of his company. Where he sometimes falls short is in updating those programs. “I’m lucky if I get to it quarterly,” says Gullahorn, who puts aside 25 percent of his commission checks to cover tax obligations, “and since I use online banking, I’ve even waited an entire year and gotten caught up for the prior 12 months in one day.”
Tammy Garner, a sales associate with Michael Saunders & Co. in Sarasota, has used a slightly different approach to taxes during her 15 years in real estate. She deposits all her money into an investment account, and takes out only the cash that she needs to live on. Because sole proprietors can sock up to $44,000 (depending on earned income) a year into their retirement accounts, Garner takes full advantage of that privilege.
Garner keeps track of her income and expenses, and then relies on her accountant to fill out her tax forms, give her an idea of the amount of estimated quarterly tax payments she should make and remind her (a month in advance) of when they’re due. She slices 25 percent off the top of each check to cover those tax obligations, and sometimes ends up with a refund in April (if, for example, business deductions for the year were higher than expected).
“Most people see their tax bill and they faint,” says sales associate Garner. “I always plan ahead for my taxes, so I’ve never gotten to that point.”
With few tax code changes on the books for the 2006 filing year, Godoy says that now is the time for sales associates to start planning for their 2007 taxes. Think about what types of activities will qualify as deductions, consider setting up a retirement plan, acknowledge that making estimated quarterly tax payments is a necessary evil and allocate a certain amount from each commission check to cover those obligations. Using these strategies, you’ll be much better prepared when the IRS deadline rolls around. Bridget McCrea is a Clearwater-based freelance writer.