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.

The Most Successful Small Business in the World – By Michael E. Gerber

If you are an entrepreneur, and you aren’t reading regularly. Not prolifically, you don’t have time for that, but regularly. You are limiting the size of your toolbox and not growing as a professional. You owe it to your customers and yourself to continue to grow as a business owner.

I picked up Michael Gerber’s book “The Most Successful Small Business in the World” at the library. Those still exist, and they are still free. Finished it in a few hours on the weekend.

I recommend everything Michael Gerber writes, he is that good, and he will change the way you think about your business. Or reinforce the good things you are already doing.

He outlines 10 principles, which I will summarize, to wet your appetite for learning more, not to supplement his writings.

  1. A small business built rightly can grow 10,000 times its current size.
  2. A small business is no more effective than the idea upon which it is built.
  3. You must recognize that a small business is a System in which all parts contribute to the success or failure of the whole.
  4. A business must be sustainable through all economic conditions, in all markets, providing meaningful, highly differentiated results to all of its customers.
  5. A small business is a School in which its employees are students, with the intention, will, and determination to grow.
  6. A small business must manifest the Higher Purpose upon which it was seeded, the vision it was meant to exemplify, the mission it was intended to fulfill.
  7. A small business is the fruit of a Higher Aim in the mind of the person who conceived it.
  8. A small business possesses a life of its own, in the service of G-d, in whom it finds reason.
  9. A small business is an economic entity, driving an economic reality, creating an economic certainty for the communities in which it thrives.
  10. A small business creates a Standard against which all small businesses are measured as either successful, or not.  All small businesses should aim to thrive beyond the standards that formerly existed, whether stated or not.

So, here is a brief explanation of each:

  1. Be Scalable, if you are a necessary part of every process, or there is no process there isn’t a business, it is you helping people.
  2. Have a big idea. Is your idea to make some side money? Or are you trying to fill a niche for a community in need? If your goal is to make a few extra bucks, your customers will feel it.
  3. Be a System.  Think in terms of how every part contributes to the whole, a flow of information, goods and services by the people and processes you have in place. And every step needs to positively contribute to that end goal.
  4. Sustainability. Is your business riding a short term wave of interest or a long term solution to a problem or need? Think Fidget Spinners vs household cleaners.
  5. Growth. Your business should be constantly learning, reassessing and improving. If that culture isn’t cultivated, it will grow stagnant and fade away. Think Blackberry, they used to be a powerhouse, now they are a joke, because they didn’t evolve.
  6. Vision. It is more than a business, look at the top companies in the world and their mission statements. They aren’t talking about maximizing shareholder value, they have a higher purpose. Think Toms, where “every purchase has a purpose.” We recently connected with an apparel company, Sovereign Apparel who operates under the same premise of Tom’s but with shirts. Which they give to the homeless. That is vision, they don’t just sell shirts, they support their community.
  7. Purpose. Your business can’t be an entity designed to support only yourself, if it is to survive past your professional life cycle, it has to be built with that in mind. Otherwise, when you are done. So, is your business.
  8. Autonomy. In the beginning the business relies upon the owner for everything, but the owner must in addition to actively working within the business be working on the business. It needs to function without the owner.
  9. Profitability. As much altruism as we want to have within our business, if the business doesn’t make money, there is a limit to how much good it can do. It should be financially rewarding for the owners, and employees. When it does that everyone has more resources to do good within the community.
  10. Standard. The best businesses in the world don’t measure their success upon their peers. If that is the case, they are a follower, not a leader. Be a leader in your industry.

This book was not written to solve a business owner’s problems, but to help them improve their mindset for the mission and purpose of their business. By following these 10 principles they can grow a more profitable business and make a greater contribution to their community.

We hope that you enjoyed our brief synopsis of Michael E. Gerber’s book, if you have any book recommendations we want to hear them, and we wish you the best of luck with your business.

If you have any questions or would like to see how Wilson Lake can help you grow your business set up an appointment with us. We would love to talk to you.

 

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.

Shark Tips from Daymond John

I recently attended a Chase for Business event. I’ll start off by saying that it was an exceptionally well put together event, and the information provided was invaluable. If you have the opportunity to go, I recommend it.

The high point of the event was Daymond John, of Shark Tank, presenting. In addition to having a great story, he is a fantastic presenter. He presented his 5 shark tips.

  • Set a goal
  • Do your Homework
  • Amor
  • Remember you are the brand
  • Keep swimming

These tips simplify, but accurately capture the hard work that goes into running a business. They also spell out shark, and lets be honest, that is a part of the branding message a business owner should also consider. It is a bit cheesy, but it helps people remember.

Set a goal

How do you know how to get somewhere if you don’t know where you are going? It is simple, but not. Setting a goal is the start of the planning process. It is the first step in building a business plan, establishing a marketing strategy, and gathering the resources you need.

Do your homework.

This step . . . More than so many others, this step is the difference between a successful entrepreneur and a person with a string of failed businesses. Daymond has an entertaining method of presentation and speaking which is drawn from his hip hop roots. Some of the most valuable information flowed so quickly as he built up to the climax of what he was saying that it was easy to miss. But it could be the difference between success and failure.

He talked about how when he started his business his mother made him right out his balance sheet, but it wasn’t the traditional financial statement. She made him clearly identify his strengths and weaknesses, his resources and what he needed. This forced him to understand the skills he didn’t have and start pursuing those with those skills, and it forced him to recognize the resources he had available, and did not have. This was his business plan, and helped him to identify blind spots he may not have otherwise had been aware of.

Homework doesn’t just mean looking inward, it means looking outward, FUBU, Daymond’s first business, was built because he recognized that there was no one who understood hip hop culture deliberately designing clothing and apparel for it. He knew his market, he knew what and how people wanted to wear his clothes, he knew where they shopped and how to communicate with his market. This isn’t to be underestimated.

Amor is love in french.

Think of this as the energy, or driving force behind your business. You need to love it. To care about the customers and clients you serve, and care about the product or service you provide. If you don’t than you will run out of energy because your business will become another job to you.

Remember you are your brand.

How you present yourself directly represents your business, if you are fun and engaging, your companies brand will have that image. If you present your company as serious and professional but you are known publicly as a drunk and a flirt you undermine your company’s professional image. Be cognizant of how your behavior represents your company.

Keep swimming.

Businesses fail. Most of them in fact, and it isn’t hard to find many situations where a business that is now a staple of its industry, or that ended up creating an industry could have failed but didn’t. Because the owners kept swimming. They didn’t give up. The looked at their business, their goal, and found a different way to solve the problem. As a result they thrived because every obstacle they overcame they left their competitors further behind them.

I was grateful for the opportunity see Daymond John live. If you haven’t read them, check out his books:

The Brand Within

The Power of Broke

Display of Power

Best of luck to you and your business.

As you grow and build your business if you identify finance, accounting or bookkeeping as a weak spot for you. Don’t spin your wheels, set up a call with us.