1. PLLC S-Corp
Real estate agents are classified as 1099 contractors which results in them having to pay 15.3% in self employment taxes (Social security & Medicare tax) on their net income on top of their income tax. When you are an employee with a W2, the 15.3% is split between you and your employer but being a 1099 contractor results in you having to cover both the employee and employer side of the Social Security and Medicare tax. If your net income is consistently more than $30,000 per year as a real estate agent or a different type of 1099 contractor, then it is recommended that you create a S-corporation to save on the 15.3% in self employment taxes. An s-corporation is also more audit friendly since most audits are done on 1040 tax returns and not on s-corp tax returns. In Arizona, real estate agents are required to create a PLLC first before electing s-corp taxation status. Creating a S-corp comes with extra filing requirements. You would have to file form 1120s and issue yourself a K1 which gets reported on your 1040 individual tax return.
The benefit of a s-corp is that not only does it save you on taxes but it also helps when you apply for loans such as a mortgage. When you report your 1099 income on a Schedule C instead of a s-corp, you tend to overly report expenses to reduce your self employment tax liability but this negatively affects you when you try to apply for a mortgage or a loan because the lenders look at your tax return. However, with a s-corp, you get the benefit of saving 15.3% on taxes plus the luxury of showing a higher income to qualify for a mortgage or loan.
2. Paying Your Children
Most business owners and real estate agents are unaware that you can pay your children a salary to help with small tasks in your business and deduct it as a business expense. You are not required to issue your children a W2 or withhold income taxes, social security taxes and Medicare taxes if the payments are less than the standard deduction of $12,950 for 2022. All you have to do is transfer money from your business bank account to your child’s bank account and in the memo section write what services were provided for the payment. That means you can pay your child who is under 18 up to $12,950 (standard deduction) every year while deducting it as a business expense and he or she is not required to file a tax return or owe any taxes.
3. Vehicle Deductions
If you purchase a used or new “small” vehicle, you can deduct up to $18,100 in the same year using section 179 and bonus depreciation if the vehicle is used 100% for business. A small vehicle is defined as one that weighs less than 6000 pounds. Larger vehicles receive a larger sec 179 deduction. If it is used less than 100%, then you would have to prorate the $18,100 with the percentage that is actually used for business. If you did not purchase a vehicle, you may also back date your current vehicle and deduct the market value of the vehicle on the day it was placed in service prorating the percentage for business use. If you have a s-corp, you would have to create a employee reimbursement plan and deduct the reimbursement on your s-corp tax return for the sec 179 vehicle deduction.
After the vehicle is placed in service, you may either deduct the standard IRS mileage rate of 56 cents per mile or actual expenses. The IRS mileage rate has been reduced from 57.5 cents to 56 cents while gas prices have increase so it may benefit you to use actual expenses rather than the mileage rate. If you use actual vehicle expenses such as gas, repairs, maintenance, insurance, depreciation etc, you cannot also use the mileage rate. You should compare both to see which one generates a larger deduction.
One thing to note is that any type of deduction including vehicle deductions are never dollar for dollar so NEVER make a purchasing decision based on tax deductions. If the deduction is $10,000, then you would only receive a tax benefit equivalent to your tax rate so if your tax rate is 20%, you would only receive a $2,000 tax credit if you even have tax liability. Business purchases should be based on your projected return on investment for making that purchase, not for tax deduction purposes. If the purchase cannot generate revenue for your business, then in most circumstances, it is a waste of money/capital.
4. Solo 401k Investment Plan
A solo 401k is a retirement plan for self employed individuals with no employees. You may contribute up to $61,000 in 2022 towards a solo 401k and deduct it on your tax return. A solo 401k may be used to purchase real estate, stocks and other investments. One can be created through many different investment brokerages online such as Fidelity.
5. Home Office Deduction
If you have an office in your home that is used exclusively for business, you may deduct a percentage of your mortgage interest, utilities, home repairs, insurance and depreciation. The percentage is based on the square footage of the room divided by the square footage of the entire home. You may also use the simplified method which is $5 per square foot multiplied by the square footage of the room up to 300 sqft so a maximum deduction of $1,500.
6. Brokerage and MLS Fees
This is a given. All brokerage and desk fees may be deducted as a business expense. All MLS dues may also be deducted which is a large yearly expense.
7. Education and Training
Real estate agents are required to take mandatory continuing education courses which may be deducted as a business expense.
8. Marketing Costs, Signs & Supplies
Marketing is a huge expense in real estate. Supra lockbox, supra monthly fee, lead generation costs, websites, supplies, signs, photography, staging, gifts and even business meals with potential clients can be deducted up to 50% of the meal.
9. Cell Phone, Laptop and other Equipment
Cell phone, laptop and other business equipment that is purchased for use in your business may be deducted. A percentage of your monthly phone bill that is used for business may also be deducted as a business expense.
10. Tax Preparation Fees
Many are unaware that tax preparation and accounting fees for all businesses including Realtors may be deducted as a business expense.
For questions or help with your taxes, email me at [email protected]
S.L Tax & Accounting is the best Laveen, Tolleson South Phoenix Arizona Tax Preparation and Accounting business providing the best services.