Many real estate agents operate their businesses as sole proprietorships. They have unique (and often complicated) tax issues because they need to incur and track a lot of expenses in order to make commissions.
This can lead to IRS or state tax problems if you don’t keep good records and take deductions properly. Watch out for the following issues that real estate agents face when planning, preparing, and paying their taxes.
Tracking Deductions
Operating as an independent contractor has its advantages, with one of the biggest being the ability to claim a deduction for ordinary and necessary business expenses. This is an even bigger benefit now that unreimbursed employee expenses have been suspended as a deduction.
It takes a lot of work to track these deductions. Real estate agents may have any of the following business expenses:
- Marketing costs, including business cards, website, social media management, signs, and flyers
- Continuing education expenses
- Real estate license costs
- Home office expenses
- Automobile expenses
- MLS fees
Develop a system to track these expenses. When it’s time to do your taxes, you don’t want to have to be chasing down receipts from six months ago. Have everything in one place.
As a business owner, you have a higher risk of being selected for an IRS audit. Be prepared by having receipts, records, or other proof for every deduction you take.
Paying Taxes
Real estate agents can have big fluctuations in their income from month-to-month or year-to-year. You may have a slow spring, and then a very profitable summer. So how do you know how much to pay in estimated taxes?
First, know your safe harbors. The easiest one to follow when you have inconsistent income is to pay at least 100% of last year’s tax liability. Divide last year’s total taxes by four and pay at least that much in quarterly estimated tax payments.
Meeting that safe harbor will allow you to avoid owing any underpayment penalties, but you may want to pay more in taxes if you are earning a lot more income this year. If you have a good quarter, consider increasing your next estimated tax payment. This way, you won’t owe as much additional tax when you file your taxes, and you may even get a refund.
If you do owe a big tax bill when you file your return, you have several tax debt repayment options. Contact a tax resolution attorney to determine the best course of action.
The Gartzman Law Firm can help you with back taxes and other IRS tax problems. Use our contact form to request a consultation with an Atlanta tax resolution attorney.