9 Ways for Realtors to Reduce Their Income Tax Bill
Do you dread tax time? You’re not alone. Experts explain how Realtors like you can pay less to Uncle Sam. Oh, happy day!
Pam Charron has a smart way to cut her income tax this year. “I maximize my contributions to my SEP-IRA retirement plan,” says Charron, broker-associate with Berkshire Hathaway HomeServices Florida Realty in Sarasota. “That provides immediate tax benefits while adding to my savings.”
Kevin Spina took advantage of a strong sales year to purchase new smartphones for his sales team and computers for the administrative staff. “We even bought extra phones for backups since one of my devices went down during the COVID-19 shutdown and I couldn’t get another one right away,” says Spina, a sales associate with The Keyes Company’s Palm Beach Gardens office.
Contributing to a qualified retirement plan and purchasing business equipment are just two of the ways independent contractors can reduce their tax liabilities for 2021. Tax deductions are available for virtually all business-related expenses, including your vehicle.
“For most people, income tax is the biggest expense each year,” says Sandy Botkin, an accountant, attorney, tax director and cofounder of Taxbot, a national firm. “If you can plug your tax holes, you can improve your financial situation and enjoy a higher quality of life.”
Doing your tax planning early in the year gives you time to make adjustments in how you manage your business, says attorney and accountant Jo Ann M. Koontz, principal, Koontz & Associates in Sarasota.
You should also take a close look at your estimated quarterly tax payments this year, especially if there was a big change in your 2020 income. “One of the biggest mistakes is not paying your quarterly taxes on time,” says Koontz. “If you sold more than anticipated, you should recalculate those payments to avoid falling behind.”
Unfortunately, Florida has an outsized number of real estate professionals who owe back taxes, according to an analysis by Solvable.com. Nationwide, taxpayers ages 51 to 65 were found to have the highest likelihood of owing back taxes, and professionals or technical workers were the most likely to carry tax debt.
To avoid tax problems and maximize your deductions, here are nine tips from accountants who are familiar with the issues facing real estate professionals. Since everyone’s financial situation is different, you should consult with a tax adviser to discuss the best tax-saving strategies for your business.
1. Open a qualified retirement account
What: An Individual Retirement Account (IRA), SEP-IRA and Roth IRA are among the options.
Why: Every dollar you contribute is subtracted from your gross income, cutting your immediate tax liability. Plus, your invested dollars can grow tax free until you withdraw the money in retirement when your income (and tax obligations) are likely to be lower.
How: Talk with your accountant or financial adviser about setting up an appropriate account.
2. Incorporate your business
What: Create a separate entity for your real estate business.
Why: Incorporating can deliver significant tax benefits, while providing legal protection in the event of a lawsuit. “You can reduce your self-employment taxes by forming a corporation,” says David Goldweitz, senior director of tax and accounting in Fiske & Company’s Kendall office. Another big advantage is the 20% personal services deduction subtracted from your gross income for 2021.
How: An attorney or accountant can help you file all the documents, including notifying your broker and the Florida Real Estate Commission (FREC) of the change.
3. Write off your devices
What: Smartphones, tablets, laptops, printers, copiers and scanners.
Why: Purchases of mobile devices and office business equipment can be fully deducted in the year of purchase, says Botkin. Other business communications costs, such as broadband or internet service, may also be deductible.
How: Track these big-ticket purchases so they can be deducted on your return.
4. Deduct your vehicle expenses
What: Business mileage or expenses related to a business vehicle.
Why: Every mile you drive for business purposes can be deducted on your tax return. In 2020, the rate was 57.5 cents per mile. If you drove 10,000 miles, that would be a nice $5,750 deduction. Alternatively, you could also deduct a percentage of your total gas, insurance, lease payment or repairs, based on business vs. personal use, says Goldweitz.
How: Use a smartphone app, a spreadsheet or a ledger to track miles and expenses. Some apps include Taxbot (a Florida Realtors Reward Partner, go to fl.taxbot.com for more info), MileIQ and TripLog, available on the Apple App Store or Google Play.
5. Pay a family member
What: Hire a teenager, parent or another family member to perform office tasks and pay a reasonable salary or wage.
Why: The dollars you pay an employee are subtracted from your gross income, reducing your tax payments. “I hired my daughter, who was majoring in digital design, to do a website,” says Botkin. “It was less expensive than using a professional agency.”
How: See if it makes sense to hire a family member as an assistant for tasks such as picking up signs, delivering documents, maintaining listings or providing professional services.
6. Benefit financially from education
What: Continuing education classes to maintain your real estate license, or training programs to increase your professional skills.
Why: You may deduct educational expenses related to your business, whether you attended a virtual or in-person class. Many Florida professionals took advantage of downtime in 2020 to earn new designations and certifications, potentially increasing the size of those deductions, says Koontz.
How: Keep records of fees, tuition and any travel-related expenses.
7. Purchase or lease a new vehicle
What: Buying or leasing a vehicle for business purposes.
Why: You may be able to gain significant tax benefits from buying or leasing a vehicle, either personally or in your business. For instance, the IRS has made it easier to depreciate the value of luxury SUVs, vans or trucks, increasing the potential tax deduction, says Botkin. “Having the right vehicle can make a big difference in your tax planning,” he adds.
How: Contact your accountant and discuss the potential tax advantages before buying or leasing a new vehicle for business purposes.
8. Deduct business-related meals, food and beverages
What: Purchases for clients, prospects or team members.
Why: Although business entertainment expenses are generally not deductible, you may still deduct 50% of the cost of a business-related meal with a client, as well as 50% of food and beverage expenses for business-related activities. “If you dropped off a platter of food for a customer who was sheltering at home or ordered drinks and snacks for an open house, you may be able to deduct half of those costs,” says Koontz.
How: Record everything you buy and include the details, such as the day, time and location of an open house.
9. Subtract your business travel expenses
What: Business, conferences, conventions, trade shows and client meetings.
Why: If you can show the primary purpose of your travel was business, you can deduct airfares, automobile mileage, hotel accommodations and meals. “If you go to a seminar in Orlando, for instance, you can’t write off theme park tickets, but your business-related expenses should be deductible,” says Botkin.
How: Keep track of your travel-related costs, as even expenses like dry cleaning may be deductible.
Richard Westlund is a Miami-based freelance writer.