Real Estate Agents, how to decide on a Business Entity

Whether you are an new independent agent, or an experienced broker, the question of incorporation, is a valuable one to consider. The type of business entity which you own and operate can have an impact on taxation, and liability among other things. Below we discuss several of the most popular options and their individual pros and cons.

Sole Proprietorship:

The sole proprietor is the simplest and most popular choice for agents. How does one become a sole proprietor? It is simple, they start running their business, there is no forms filed with the state, aside from the mandatory licenses related to being an agent and business tax licenses. But there is no special declaration needed to become a sole proprietor.

Pro: 

  • All taxes pass through directly to the agent’s personal return. A Schedule C (1040) must be completed at tax time, but taxes are otherwise very simple.
  • Sole proprietors may still enter into contracts and hire employees. From an operational standpoint, the sole proprietorship, can do the same things as any other business form, it is simply an extension of the owner.

Con:

  • Liability.
  • Liability.
  • Liability. We want to emphasize that. If your business is not legally separated from the owner, then the risk and liability related to the business owner is wholly associated with that owner. Creditors of the business may seize personal assets, and lawsuits related to the business are made directly upon the owner without any level of protection.

General Partnership:

A General Partnership is entered into when two individuals decide to form a business, or join in a joint venture. Similar to the Sole proprietorship, no paperwork must be filed with the state. Unlike a Sole proprietorship, however, the General Partnership does have a separate legal existence. This means property acquired, and income generated are owned by the partnership, to be distributed based upon the partnership agreement.

Pro:

  • For the purposes of taxation, a partnership is a pass through entity similar to the Sole proprietorship. The difference is the forms needed to be filed. A 1065 is necessary to inform the IRS of the individual income and expenses which can be attributable to each partner for their own personal returns. The 1065, which contains the famous Schedule K-1, is used to fill out the individual partner’s 1040.

Cons:

  • Liability remains a risk here. Although the partnership is a separate entity, the risk for debts and legal action remain with the partners.

Limited Liability Company (LLC):

The LLC, for an individual, or LLP (Limited Liability Partnership) are a means of incorporating which provides a limited liability barrier between the company and the owners. Incorporation is required with the state (not required to be state of residency, but that is a more advanced topic not to be covered here). This means paperwork must be filed, and additional levels of legal and financial expertise are required.

Pro:

  • A layer of legal protection between debtors and lawsuits between the owners and their business. Keep in mind that for most small businesses, banks often require personal guarantees on loans.
  • Taxation is still pass through, and similar forms must be filed as with the partnership.

Cons:

  • Although the owners have a layer of protection from lawsuits and debtors, that isn’t an absolute protection. If a broker is involved in the wrongdoing of their agent, than they are still liable. Business entity protection is separate from licensure liability. If an owner did something wrong, than they are still liable.
  • There are expenses and more administrative requirements related to a LLC/LLP compared with the previously mentioned entities. They can get expensive, several hundred dollars or more, dependent upon the state.

Corporation:

Corporations have a long history, and are seen as reliable, and consistent. Small businesses have the option of electing to be “S” corporations, which are able to take advantage of pass through taxation, as well as many corporate tax deductions. They are subject to very strict rules to maintain their “S” corp status.

Corporations file separate taxes, are subject to greater required documentation, and higher formation fees. They are considered to be a completely separate entity for legal purposes, as well.

In some states Real Estate Agents, as well as other professionals, including Doctors, Lawyers, and Accountants may file for a Professional Corporation or LLC/LLP, which require an additional level of approval through their licensing board.

Pro:

  • Corporations have greater flexibility and accessibility to funding, including the issuance of stock in exchange for cash or assets, and more comfort with lenders.
  • Greater division between entity and owners for liability, but this does not eliminate the risk of licensure related to owner misconduct or misconduct of their employees if the broker, or agent is involved.
  • Tax deduction for salary, and bonuses to employees, which the owners may be classified as.

Cons:

  • Corporations file a separate tax forms, and pay taxes separately, except with the “S” corp election.
  • Unless the corporation is an “S” Corp than the there is a risk of double taxation, where the income of the corporation is taxed, and any distributions to owners are taxed on their personal returns as well.
  • Greater levels of complexity, require more administrative forms, and fees related to them. Not just in incorporation, but with taxation and maintenance of the company.

As you can see, the decision whether or not to incorporate, and at what level is not an easy one, there are benefits and costs to each type of entity. We recommend doing more research and consulting with your financial as well as legal advisors to help you to make the best decision on what is right for you.

Thank you,

Adam

Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate legal professional, financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties. 

How to Enter Retention for Construction Companies

We were approached by one of our favorite construction clients the other day. They had a Invoices on their Accounts receivable reports that were over 250 days over due. The problem wasn’t that they were overdue, it was that every time they looked at that report, they had to remind themselves that those items were in retention. There wasn’t a clear way for them to identify their receivables in retention, from their normal receivables.

First, what is retention?

Retention is an established amount of money that a primary contractor may hold from their sub contractors while waiting for some pre established condition to pay out the full amount of the invoice. The reasons that they may not have paid retention include, completion of the overall contract or payment of the primary contractor. There are a lot of other factors that may be involved, but when the company is a sub contractor working for a larger primary contractor, it is normal to expect retention.

Here are a couple things to consider when considering how to account for retention properly:

  • If the business is on a cash basis, then this isn’t an issue, revenue is recognized when the cash is received so everything below doesn’t matter.
  • If the business is on an accrual basis it is important to ensure that the entire amount of the revenue is recognized at the time of the original invoice. If the revenue for the entirety of the services is $100,000, but there is a 10% retention on the invoice, it is appropriate to expect only $90,000, to be paid on the invoice.
  • Quickbooks has quirks, these exist because it is attempting to make life easier for bookkeepers, but when transactions are more complex, a well thought approach is necessary.

In order to make sure that our approach addresses the needs of accrual basis and the quirks of Quickbooks.

We will work our way through the full transaction cycle of this retention. Preparing for retention, the original invoice, payment on the original invoice, and payment on retention.

Preparing for retention receivables:

  1. Create an account as a current asset called “Retention Receivables.”
  2. Create an item titled “Retention” and ensure that the account it is attached to is the “Retention Receivables” account that you just created.

The Original Invoice:

  1. Bill an invoice as you normally would, as if there were no retention.
  2. At the bottom of the item list of the invoice, add the item “Retention” that was created earlier. This item will be for a negative amount.
  3. Double check that the invoice is for the amount of cash expected to be received. We have an example below:

Retention is 10% on a $100,000 invoice. The entity has performed $100,000 worth of services and expect $100,000 when the entity is eventually paid in full. On the first invoice, there will be $100,000 worth of revenue, offset by the -$10,000 retention item (100,000 x 10% = 10,000). The total billed invoice will be for $90,000, it will show the full $100,000, but it will also show the expected retention to be paid in the future. The amount due, however, is $90,000.

Invoicing for Retention:

  1. Create an invoice for the total retention expected to be paid (a positive number now), date it the same date as the original invoice, and we recommend a modified version of the original invoice number. If the invoice number was #5054, the modified would be #5054R. Or whatever works for your entity.
  2. There is no need to send this invoice to the customer, as the information was transmitted to the customer in the original invoice.

Now there are two invoices on the Receivables report, one for the original invoice, and one for the retention. The total amount being the amount of total payment eventually expected. In our example, it should be $90,000 and $10,000 for a total of $100,000, which is the original value of the services.

Payment on the original invoice:

  1. Payment will be received, lets say for the $90,000.
  2. Apply that payment to original invoice, and clear the invoice.

Now there should only be the retention invoice remaining on the Receivables report. The reason we elect to create an invoice for that receivables report, compared with simply leaving the balances in the Retention Receivables report is a matter of workflow compared with accounting. The accounting considerations are properly addressed either way. But when the Retention amount is immediately invoiced, it allows the users of that Retention Receivables report to see that balance is still owed without having to run a second report.

Payment on the Retention:

  1. Payment in full or partial arrives on the retention. Some primary contractors pay half at the completion of the sub contractors work, and the other half at the end of the contract. Either way, at some point the entity should be paid some amount on the retention.
  2. Apply the payment to the Retention invoice, whether full or partial.
  3. If it is in full then the retention invoice is cleared and the entity is made whole, if it is paid in partial, that partial invoice will remain on the Receivables report.

Did this answer your question, let us know in the comments below. If we missed something, let us know. We can always update this if we learn something new.

Thank you,

Adam

Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate legal professional, financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.

10 Tax tips for Real Estate Agents to Start Saving Right Now

When does tax preparation start?

If you are doing it right it is January 1st.

Does that mean after the year is done and you are gathering your documents?

No, that means the first day of the year. That way when the year ends, all you have to do is grab a couple pending documents and set an appointment with your tax specialist.

Here are 10 steps that you can start now, even if it isn’t January 1, it is better sooner than later. This will save you and your tax specialist during the tax time. It is important to remember, if you are saving your tax specialist time, you are saving yourself money. Because complex clients are charged more.

  1. Track your mileage, there are a lot of ways to do it, some are more technical than others. There are some great apps that can help track your mileage.
    1. If you are using Freshbooks or Quickbooks Self Employed as your accounting software, it can track your mileage and input it into your expenses for you. This is our recommended approach.
    2. A mileage specific tracking app. C-Net recommends Mileage Expense Log, MileIQ, and TripLog. None of them are free, and data rates apply, but they are easy options.
    3. If you are not using software, a manual tracking book can be used, but if you are anything like us, we forget to input it.
    4. If you have a work only vehicle it is easy, subtract your odometer reading at the end of last year from your current and that is it. But that isn’t a feasible option for everyone.
    5. There is an option to estimate based upon total miles driven, and applying a percentage for personal vs business use.

Something to consider is the exactness, and level of documentation behind each option as they move down the list. In the unfortunate even to of an audit the better your documentation, the better your chances of coming out ahead. Additionally, we know that you have the option of using the $.555 per mile rate, or a by expense method. We recommend using the mileage rate as it is easier to apply and document, as opposed to a thousand receipts for gas, car washes, repairs, and a depreciation schedule.

  1. Legal and professional services, which include all legal and professional fees as long as they are an ordinary part of your business.

What does “ordinary part of your business” mean?

A rule of thumb is that if you need the service to continue operations of your business you can deduct it. So, if you are paying an accountant to do your bookkeeping, and taxes, those are deductible. And if you are paying a lawyer for ordinary business activities, or defense during a law suit (Your fines, if incurred are not tax deductible.). However, if you are going through a divorce, that is outside the ordinary course of business and not tax deductible.

  1. Home office deduction, there are more details on this, one so please consult with your tax specialist. But if you perform work out of a home office, it is deductible. As long as that home office is only for the purpose of a home office. Repurposing your kitchen table doesn’t count.
  2. Marketing expenses, if in the course of ordinary business, you incur advertising costs they are fully deductible. This includes staging, brochures, and photography costs used in an open house.
  3. Business Entertainment, which is probably the most fun, but also subject to additional consideration. If in order to attract a potential client or improve your professional network you go out to lunch, the expense is cut in half for tax deduction purposes. The simple way to document this is using Freshbooks or Quickbooks Self Employed. Through that software, you can take a picture of the receipt through your app, and label it as entertainment or food. The software will know that for tax purposes, your $100 bill is only deductible up to $50. Otherwise you can save your receipt and make a quick note of who you were meeting on your receipt and tuck it into your shoebox when you get home.
  4. Membership dues are deductible. If you pay any amount to be a member of a professional organization, such as your pre-licensing training, exam fees, membership dues, broker fees, broker fees, and dues to any other professional organization fees such as REALTOR ®.
  5. State and Local Income taxes, are deductible as they apply to your commissions, when determining your federal income tax return.
  6. Office Expenses, none of us can avoid them, expenses such furniture, rent and other fixed office expense. These can range from software costs, like Microsoft office to the company that comes into handle shredding.
  7. Employee wages, if you are paying an amount to an employee for their work, then it is deductible, this includes taxes and benefits.
  8. Business travel, expenses include airfare, meals, car rental, parking/tolls, tips, and lodging are tax deductible. There are limitations, and paring a business trip with a personal vacation can create tax complexities which you need to consult your tax specialist on.

It is important with any of these that you maintain supporting documentation for your expenses, if you do not take advantage of the excellent software solutions out there like Freshbooks and Quickbooks Self Employed to track and document your expenses, you will need to be organized, saving receipts and labeling them for what they are attributed to. Being prepared, and organized will save you and your tax specialist a big headache during tax season.

Thank you,

Adam

Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining legal, accounting, or other financial advice from an appropriate legal professional, financial adviser or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.

Welcome to Wilson Lake

Here at Wilson Lake, we are excited to welcome you to our website and have the opportunity to introduce ourselves to you.

We are an advisory firm that provides bookkeeping services.

What does that mean? We provide bookkeeping services, and leverage the knowledge that we gain to provide actionable information to help you grow your business. The type of advice that we provide is based upon our Access Level Agreement. This is because different questions require different levels of complexity and technical expertise for us to give you a good answer.

Our goal is to develop the type of relationship with you which encourages you to ask better questions.

We recognize that the world is changing and fast. The bookkeeping space is no different. Our approach is to leverage automation solutions, and cloud technology to reduce the amount of manual entries that take place on a day to day basis. We don’t believe you want to pay us to sit at a computer typing in invoices, but to convert your financial transactions into actionable information which you can use to grow your business.

We don’t do any of this without you, Our goal is to incorporate you into the process and help you feel comfortable with the process. Your success is our measure of success.

Thank you,

Adam