A Real Estate Agents Secret Weapon for Tax Deductions and Retirement – SEP IRA

Being self employed, is hard. We have said it before, and you know it as much as anyone else, you wear all the hats in your business, are expected to be the master of each, and know everything. The benefit is you reap all the rewards, the downside is you suffer all the consequences. Tax time and retirement are a part of that. If you have spent your career hustling and making great money, but not setting aside for retirement it is you who suffers.

We want to put a secret weapon into your arsenal. Something that will help you plan for a future where one day you will stop working, and help you to pay less taxes. That secret weapon comes directly from the IRS, and is called the Simplified Employee Pension or SEP IRA.

The SEP IRA is a retirement plan that can be set up by the self employed individual, as an employer and employee of their own business, they can contribute up to 25% of their income, up to $54,000. That means $25,000 for someone who makes $100,000.

The value is:

  • $25,000 deducted from taxable income
  • $25,000 for retirement

This isn’t cash out the door, this is cash invested in your future. This SEP IRA can also be managed by a professional, you don’t have to put on your investment hat and learn a new skill, you can leverage an expert to manage it for you. Check out the chart on Motley Fool’s page for an idea of what $10,000 invested annually at 8% growth looks like.

Here are two links which have more detail about the SEP IRA:

Motley Fool

IRS.gov

Below are some requirements to set up an SEP IRA, from Motley Fool:

  • Only the employer (or self-employed person) contributes to the account, and there are generally no filing requirements for the employer. (Employees may also contribute to their own IRAs separately.)
  • Contributions are made on a pre-tax basis, lowering the employees’ taxable income for the year of the contribution.
  • The employee is always 100% vested in the accounts, meaning that the contributions made immediately belong to him or her.
  • The employer’s contribution rate must be the same for all eligible employees.
  • The SEP-IRA’s large contribution limit offers flexibility that’s good for businesses with variable cash flow: Employers can contribute in flush years and less in difficult years.
  • Loans from SEP-IRAs are not permitted.
  • Early withdrawals will face a 10% extra tax if the withdrawer is younger than 59-1/2.
  • Beginning at age 70-1/2, required minimum distributions (RMDs) must be taken annually, as with traditional (but not Roth) IRAs.

These are the types of items that should be incorporated into your tax planning strategy, work with your accountant, or tax preparer to help improve your current and future financial health.

Would you like our help with this? Click here to schedule a call.

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 do Tax deductions work?

There is a lot of misconceptions about how tax deductions work, and we want to help demystify this a little bit.

We at Wilson Lake don’t recommend purchases solely for the purpose of obtaining a tax benefit. There are times where it can be beneficial to make a purchase because there are tax benefits, but there needs to be a business case. A rule of thumb is to ask the question:

Would we make this purchase without the tax benefit?

If the answer is yes, or even maybe, then the purchase decision should be moved forward. But if your answer is a flat “no,” then don’t make the purchase.

How does a deduction work?

We think of the tax code as a complex version of the financial reporting standards for normal operations. The IRS recognizes that there is some wiggle room inside of the financial reporting standards, so they have created their own rules to decide what is and is not deductible. In the end businesses and people are left with what is called their Adjusted Gross Income (AGI).

Are we oversimplifying this? Yes.

For a sole proprietor, here is an example:

Taxable revenue of: $100,000

Tax Deductions of :    $30,000

AGI of $70,000

Tax bracket of 25% would make their tax liability approx:

13,238.75 = 5,226.25 + (8,012.5 = 25% x (70,000-37,950))

I picked up the tax brackets from the Tax Foundation here.

For the purposes of consideration, lets consider the above individual owns a small construction company and decides that they want a big shiny new truck, which will be a great tax deduction. So, they decide to buy a $20,000 truck. (We recognize that is cheap for a big shiny new truck)

So, our owner deducts their $20,000 for their truck to arrive at their new AGI. (Note that it isn’t a straight deduction, there is depreciation and other considerations, but this is a simplified example)

New AGI: $50,000

Same tax bracket, but new liability:

8,238.75 = 5,226.25 + (3,012.5 = 25% x (50,000-37,950))

There was a total of $5,000 savings.

We want to highlight that this illustration shows it isn’t a one for one swap on these purchases. But there was a tax savings.

Now, the net for this business owner for the purchase of the truck is $15,000, which is the purchase price less the tax savings.

It is still $15,000 cash outflow.

If there had been a business need for the truck, perhaps the old one was having maintenance issues, and was not presenting a professional appearance to customers than it would be worth it. But if it was a purchase for the sake of deductions and vanity it would be a poor decision.

As you are making decisions throughout the year, consult with your accountant. They can be invaluable for advise on large purchases.
Would you like our help with this? Click here to schedule a call.

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.

3 Tips to Avoid Surprises at Tax Time, for Real Estate Agents and Independent Contractors

Independent Contractors, and other 1099 type individuals such as Real Estate agents are in a unique position compared with more traditional employees. They are not subject to normal tax withholdings, and are responsible for managing their own tax payment and planning. This can create a surprising burden for those focused on the day to day challenges of keeping up with their professional responsibilities.

We offer the 3 steps to help you prepare. These are the same steps that we follow to provide services for our Agents and independent contractors to help them be successful throughout the year and at tax time.

1. Get organized

There is a lot to this, but something is better than nothing. Your organization system should be automated, and pain free. The easy way to do this, is to have a separate; card or bank account (Preferably) where all business transactions flow. This means only business, if it is a separate personal checking account, or a business checking, separating personal from business will help a software solution to easily classify transactions without you having to identify all the personal ones to exclude.

We recommend Freshbooks. It was designed for low complexity businesses, real estate agents, and independent contractors. It uses a feed from your bank to capture transactions. Easy ones like your morning coffee it classifies itself, other ones can be classified quickly and easily. It also integrates with MileIQ to track mileage automatically.

By getting organized you can more clearly identify how much money you have made and your deductible expenses. Which leads us to tip #2.

2. Plan ahead

There are a couple ways to do this, a simple method is to use a tax calculator to estimate your taxes and set the cash aside in a savings account. You can use these calculators, but recognize your final tax liability may be more or less. The goal here is to have cash available to pay your taxes, and reduce the impact of your tax liability at year end.

HR Block calculator

TurboTax Calculator

The other way to manage this is to make quarterly tax payments to the IRS, there are some rules related to this, so do your due diligence, but you can fill out a 1040-ES and make your payments online to the IRS here.

3. Maximize deductions

Know your deductions and track them throughout the year. We have more details on them in our blog 10 Tax tips for Real Estate Agents to Start Saving Right Now, you need to know them, track them throughout the year, and have all the supporting documentation consolidated in one place. Using software like Freshbooks, can accomplish this for you.

A final, rarely discussed method of tax savings available to independent contractors is called the Simplified Employee Pension or SEP IRA is available to Real Estate Agents, and other 1099 individuals. This can be a powerful way to both save for retirement and create a truly significant tax deduction. That deduction can be as much as $54,000 in 2017, based upon your contributions.

To summarize

  1. Get organized
  2. Plan ahead
  3. Maximize deductions

However you accomplish this, you will be better off than if you hadn’t.

It is important to do this sooner rather than later, it takes time to get it right, and the year end is less than 2 months away, or less depending on when you read this.

Our Pitch

At Wilson Lake we recognize a few things about Real Estate Agents, and independent contractors, specifically about their time:

  • It is the most scarce resource
  • Everything above still takes time to learn
  • No matter how easy, it takes precious time to execute
  • Time spent on tax preparation is time not selling, or caring for clients
  • Time spent working is time spent away from living your life

We do offer services to Agents and independent contractors, where we manage the above so that you can focus on higher return tasks. When someone buys our services they aren’t paying for compliance and planning, they are buying their own time back, and getting a financial partner to help them be successful.

If you are interested in learning more about how we can help you, download our one-pager, which describes our services:

Wilson Lake for Real Estate Agents

You can also contact us directly by filling out the short form below.

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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.

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. 

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.