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The most valuable asset you have as a real estate agent is time. You want to invest your time, not waste it. Invested time is utilized performing one of two activities: 1) Making current clients happy (profitably), and 2) Getting new clients. All other business minutes are either spent on necessary tasks that mitigate a crisis or wasted on activities that have no direct relationship with making sales. (For more information on effective time management check out our article Grow Your Business, Invest Your Minutes).
Minimizing your taxes is a different type of investment; it helps to cut your most significant expense! Every thousand dollars properly deducted can save up to $400 of tax! Two critical factors in maximizing your after-tax profit are: 1) Learning what’s deductible, and 2) How to substantiate the deductions claimed on your tax return.
It’s Your Responsibility: It’s the taxpayer’s responsibility to prove they’re legally entitled to all deductions claimed on their tax return. To do so, they must prove that each deduction was ordinary and necessary for their business. They must also substantiate that each deduction in terms of time, place, and amount claimed.
To maximize their after-tax profit, a real estate agent should develop a basic understanding of which transactions are and are not deductible. Helping real estate agents develop this understanding is why we created the Real Estate Tax Cut Library. Volume three of the library shares an efficient and effective way agents can track their expenses and substantiate their deductions. This article will highlight this methodology. But first, let’s take a look at the consequences of being unable to substantiate deductions.
Lost Deductions: There are two primary reasons real estate agents lose deductions and pay more tax than they should. The first is relatively simple – they’re busy, they’re on the road a lot, and they have a family and a life. As a result, its super-easy to forget about deductible transactions incurred throughout the day. No need to substantiate deductions they didn’t claim - they don’t even know what they are!
The second cause of lost deductions is much more consequential - the IRS denies them during an audit. The IRS knows that the self-employed are the low-hanging fruit of the tax world. Why? They do not make tracking expenses a priority, tend to re-construct deductions when tax time arrives, and are not able to substantiate the deductions claimed.
An audit is stressful for anyone, but for those who lack proper records, they can prove emotionally and financially devastating. Emotionally, it’s like being the target of a criminal investigation, except it’s not the auditor’s job to prove you’re guilty. It's your responsibility to prove that you're innocent - that you’re entitled to every deduction. Financially, denied deductions result in additional tax, interest, and penalties. Worse yet, you run the risk of having more years audited.
Easy Recordkeeping Steps: Following these easy recordkeeping steps will ensure that you can confidently and quickly substantiate your deductions.
Using a separate checking account exclusively for the business may also protect non-business assets in a lawsuit (depending on your business structure - ask an attorney).
Keep the remaining envelope in your home or outside office where you pay business bills and make online purchases.
Now that you have your envelopes put every business receipt into your car or office manila envelope as soon as you make the purchase or pay the bill.If you're leaving the office supply store, do not place the receipt in the bag. Keep it in hand until you get to your car, then put it in your car envelope!
If you do not have an efficient way to track your expenses, you will need to use a spreadsheet, bookkeeping software, of columnar sheets to record and categorize them.
At the end of each month, transfer all receipts to a single 10*13 manila envelope and write the month or year on it in large print.Then, seal the envelope so no receipts can escape. Next, place each monthly envelope in a place where they can be easily located.At the end of the year, bind them together with a big rubber band and store them with essential documents.Make sure you keep your bundled receipts for AT LEAST three years after filing your tax return.
Why the Manila Receipt System: Using a single bank account and credit card for business will allow you to categorize monthly expenses easily. The manila receipt system will ensure you do not lose any receipts for those expenses and can quickly substantiate all business deductions on your tax return.
Summary and Invite: By following the steps listed above, your business transactions will be easy to track, so you can quickly and confidently maximize deductions, and easily substantiate them when needed. You will also have more time to invest 1) Making clients happy, and 2) Getting new clients!
If you’d like to learn more about cutting your largest expense, TAXES, check out our Real Estate Agent Tax Cut Library. The Real Estate Agent Tax Cut Library includes over eight hours of video broken into twenty-nine searchable volumes and covers every possible deduction a Real Estate Agent can take on their tax return. Our Broker Version will help your entire agency cut their taxes! We also invite you to browse our courses.
All courses and articles are for informational purposes only and do not constitute tax advice. Taxes are complicated - do not act on course information without consulting a professional. Always refer to treasury regulation before making any tax decision. Read the full disclaimer.
This course package is thorough and will give you a solid handle on how to optimize your business expenses to minimize your taxes and keep appropriate records to handle any IRS challenges. Only want to dive into a particular topic? Jump to that video and scan forward to where your issue is addressed. Or watch the whole series to learn it all!- Josh, Charles Town, WV, Real Estate Agent Tax-Cut Library, Agent Edition Course
This tutorial has been extremely helpful and informative. I appreciate it and am really glad I Googled for help.- Kathryn, Galloway, NJ, 1120-H Basics Course
Your video class on this issue (HOA taxes) has given me the confidence to go forward.- Desmond, Frederick, MD, 1120-H Basics Course
Thanks for offering Overnight Accountant!- Josh, Charles Town, WV, 1099-MISC Basics Course
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