You can see the division in the streets: Some citizens walking around with hands in pockets, whistling jauntily, not a care in the world, while others sacrifice their posture, health and stress levels worrying about what’s to come.
We’re talking about tax season, of course — and how easy it is to tell the “already filed” group from the “still collecting deduction details” group.
If the latter describes you, then we feel your pain: Getting your tax deductions together as an independent contractor is arguably the most painful part of the process. (Especially if you weren’t filing your estimated taxes throughout the year … and be honest: Who does that?)
Here are some tips (and a checklist) to help take you from sad and shuffling to footloose and grinning — and hopefully land some more money in your bank account, too.
What can you claim?
As an independent contractor (which defines the majority of real estate agents), the good news is that if you’ve kept track of your expenses throughout the year, you can claim tax savings on most of the money you’ve sunk into your business (potentially all of it, if you’re smart).
Deductible business expenses must be the following, according to the IRS:
- Ordinary
- Necessary
- Reasonable
You should be able to show that anything you’re claiming on your taxes is a standard expense for doing business in your line of work (ordinary), that it’s required to get the job done the way it should be (necessary), and that you aren’t claiming an outlandish amount of money for something that should have been relatively cheap to purchase (reasonable).
So that includes …
Marketing and advertising expenses, mileage, home office space and a few other goodies (which we’ll dig into below).
“There are a ton of expenses you incur, and knowing exactly what deductions you’re entitled to makes a big difference,” notes Tade Anzalone, tax and finance support lead at Stride Health, a California startup connecting consumers with health insurance plans. “I see a lot of people who don’t know exactly what they can do — they either don’t take the deduction or take half of what they should take.”
And don’t ballpark, she advises. “You only want to deduct things you can back up,” she said. “For real estate agents, there are a lot of different places they’re getting income,” and good bookkeeping habits through the year are critical. (Start immediately for next year if you haven’t already!)
Do I have a home office?
If you use part of your home for business — whether you rent or own — then you could be eligible for a home office deduction.
A home office must be both:
- Regular and exclusive to your business — you can’t work on your laptop in your living room (for example) and claim the entire living room. However, a separate room that’s used as an office (or a delineated space that’s only used for work) would qualify.
- Your principal place of business — it’s acceptable to meet clients and conduct business in other spaces in addition to your home, but the bulk of the work for your business should take place within those home office walls. “If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction,” the IRS states.
The home office deduction is calculated based on the percentage of your home that’s devoted to business use. “If you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities,” notes the IRS.
You have two options for deducting a home office — you can take a simplified or regular method of calculation. The simplified method deducts a standard $5 per square foot of the home office, plus any home-related itemized deductions, and no depreciation deduction. It might be a better choice for smaller offices, as it’s capped at 300 square feet.
The regular method takes the percentage of the home used for business and actual expenses to determine the deduction. There is no limit to the size of the home office you can claim using the regular method.
“In the Northeast, real estate is expensive, so typically we want the actual expense,” notes Dr. Stanley Veliotis, an associate professor of accounting and taxation at Fordham University’s Gabelli School of Business. If you’ve got a nine-room house and use one room exclusively as a home office, Veliotis says, you can calculate into your home office deduction 1/9th of the home depreciation, mortgage interest, real estate taxes, snowplowing the driveway and many other home-related costs.
He adds that every year during tax season, he takes pictures of his home office with his phone. “I email that to myself in case I get audited, which might not happen for three years,” he noted. By that time, you might have decide to turn your home office into an exercise room or kids’ play area, so having proof of what it used to be could come in handy.
Don’t double-dip
Be wary of double-dipping, Anzalone adds.
“The biggest mistake we want to warn people about is double deductions with vehicle expenses,” she said. “When you’re self-employed, you can deduct your vehicle expenses in two different ways. You can itemize out all of the expenses — gas, maintenance costs, car insurance — as one option, and the other method is the standard mileage deduction.”
That standard mileage rate changed again from 2016 (54 cents) to 2017 (53.5 cents), so make sure you’re claiming the appropriate mileage deduction if that’s your choice.
“If you were to take the standard mileage deduction and then take the itemized deduction, you’re taking the same deduction twice,” explained Anzalone. “A big audit flag is having a really high deduction, and because you’re double-deducting the same thing, you could potentially have all your deductions thrown out — it’s definitely really important to claim one.”
Which one to claim? Most drivers will probably want to use the standard mileage rate — however, anyone who’s got an expensive or unusually gas-guzzling vehicle (in other words, if you drive a Hummer) could claim a significantly higher deduction if they itemize. (Save those receipts!)
What about that estimated tax payment stuff?
If you aren’t paying estimated taxes on your quarterly income throughout this tax year, then not only are you setting yourself for a hefty bill next year, but you’ll also likely incur a penalty for paying late, notes Veliotis.
“The IRS doesn’t want you paying all your taxes on April 15,” he said. “It wants the money paid in on a current basis.”
Here’s what that could mean for agents, he explains.
“If I made $1 million bottom line taxable income, the income tax and S.E. tax (i.e., Social Security tax) might be $400,000 owed for the year. If it’s all paid in April instead of quarterly, they’re going to hit you with $10,000 or more in time charges. You have to pay in equal installments during the year roughly one-quarter of what’s owed.”
This gets tricky for real estate agents, who might make the bulk of their income in the span of one or two quarters. Veliotis suggests that agents in this situation file Form 2210 with the IRS so that the IRS understands that income was earned in chunks, not pro rata (at a regular rate), during the tax year, and adjusts any penalties for not paying estimated taxes on time accordingly.
Another option, Veliotis notes, is figuring out the minimum amount needed to pay each quarter for estimated taxes — keeping more money in your bank account. Agents whose adjusted gross income (AGI) is less than $150,000 can use their tax from last year if they want to pay just the minimum this year — agents making more than $150,000 can pay 110 percent of last year’s tax.
Agents who own rental property
There’s another noteworthy benefit for real estate professionals in particular, many of whom purchase real estate themselves to rent out.
Regular citizens who buy rental properties and suffer a loss from the investment are subject to “passive loss limits” — they aren’t allowed to claim that loss in its entirety on their taxes; there is a cap on the amount they may currently deduct, and often they can deduct nothing. However, that cap does not apply to most real estate agents’ rentals.
“Agents who have rental losses typically can avoid the passive loss limits that apply to most Americans,” said Veliotis. A real estate professional is defined by the IRS as anyone whose primary profession is real estate and who spends more than 750 hours a year working in the industry.
The checklist
These are some common categories of expenses you’ll want to keep an eye on when filing your 2016 taxes — and throughout 2017. Print two copies!
Branding and advertising expenses
- Websites
- Domain name fees
- Hosting fees
- Design fees
- Advertising
- Billboards
- Newspapers
- Radio
- Television
- Direct mailing expenses
- Fliers
- Postcards
- Postage
- Mailing list purchases
- Emailing expenses
- Software
- Newsletter design
- Newsletter content
- Creative fees
- Content
- Editing
- Design
- Social media management
- Promotional materials and swag
- Business cards
- Pens
- T-shirts
- Branded gifts
- Signage
- Networking event fees
- Entry fees
- Travel
Office expenses
- Home office expenses (if you qualify — you must have a designated area in your home used exclusively for conducting business, and you must either use your home as your principal place of business or be able to show that you use your home office “substantially and regularly”)
- You can claim a deduction based on the size of your home office — the percentage of your home that it occupies
- Office supplies
- Postage
- Envelopes
- Paper
- Folders
- Pens
- Printer ink
- Office furniture
- Desks
- Chairs
- Bookshelves
- Filing cabinets
- Business office expenses
- Desk fees or other office rent/mortgage
- Janitorial fees
- Office supplies (see above)
- Office furniture (see above)
- Client refreshments (coffee, cookies, etc.)
- Software
- Cloud storage
Professional expenses
- Association dues and fees
- NAR
- State associations
- Local associations
- Independent brokerage associations
- Franchise fees
- MLS fees
- Chamber of Commerce registration/membership fees
- Accounting or bookkeeping fees (including for tax preparation)
- Banking fees
- Business licenses
- Errors and omissions insurance
- Legal fees
Transportation and travel expenses
- Air fare for business travel
- Cab fares for business travel
- Car rentals
- Car/truck expenses
- You can deduct 54 cents for each mile driven for business in 2016 and 53.5 cents for each mile driven for business in 2017 (and include parking expenses), OR tally a business rate for:
- Auto depreciation
- Insurance
- Car loan interest
- Lease payments
- License plate/registration fees
- Parking fees
- Toll fees
- Car washes
- Tires
- Maintenance/repairs
- You can deduct 54 cents for each mile driven for business in 2016 and 53.5 cents for each mile driven for business in 2017 (and include parking expenses), OR tally a business rate for:
- Lodging
- Meals
- Parking/tolls
- Public transportation
- Tips
Communication expenses
- Cell phone
- Cell phone service
- Answering service
- Fax service/expenses
- Internet service
- Office phone line/telephone service
- Toll-free numbers
Equipment
- Computer/laptop
- Computer software
- Calculators
- Cameras
- GPS
- Printer
- Scanner
- Tablet
- Memory storage (hard drives, flash drives)
- Equipment repair
- Lockboxes
- Maps or map books
- Staging items or furniture
- Tape measure
Business expenses
- Referral fees
- Commission rebates
- Taxes paid
- Appraisal fees
- Courier or delivery service fees
- Home repair fees
- Home warranty fees
- Home inspection fees
- Notary fees
- Open house expenses
- Staging fees
Employees
- Payroll
- Unemployment taxes
- Sales assistant wages
- Virtual assistant wages
- Administrative fees or wages
Retirement, health care and other insurance
- Self-employment pension
- IRAs/401(k) contributions
- Health insurance premiums
- Business liability insurance
- Business equipment insurance
Interest
- Interest on business loans
- Interest paid on business credit cards
Continuing education
- Subscriptions to professional journals or magazines
- Books
- Newsletter subscriptions
- Sales training or coaching
- Sales seminars
- Textbooks or reference books
- Travel to business conventions
- Convention fees
- Transportation
- Lodging
- Food
- Trade publications (like your Select membership)
Other
- Business gifts (up to $25)
- Business meals and entertainment (only 50 percent deductible)
Check your numbers twice and possibly thrice, advises Veliotis — you don’t want to discover that the commission you paid out to that buyer’s agent in January has been mistakenly added to your income.
You can learn more about filing as an independent contractor on the IRS website.
And don’t forget about starting on those 2017 taxes!
“Not forming good tax habits at the beginning of the tax year really comes back to bite you,” concluded Anzalone.
