Since SilkRoad Realty, Inc. was started by a CPA, we are committed in providing our agents with up to date real estate and tax knowledge.
For more information, please do not hesitate to call David Silkman, CPA, MST, Broker at 310.478.9200 x301 or email him at david@SilkRoadRealtyInc.com.
For 21 tax tips for real estate professionals, please click here. For a brochure to help you keep track of your expenses, please click here.
Home Office Deduction
If you have a home office, then you are entitled to deduct a percentage of all of your home expenses such as utilities, maintenance, gardener, pool service, mortgage interest, property taxes, insurance and any other expenses that are related to the home.
The percentage is based on the size of the of home office as compared to the total square footage of the home. Therefore, you should keep track of all of your home expenses.
As a real estate professional, your automobile is a big part of your profession. It is used constantly for business. Therefore, you have the option of either deducting the actual expenses or taking the standard mileage deductions.
The following are the expenses that can be deducted under the actual expense method: Gas, insurance, repairs, car washes, DMV fees, lease payments, parking and interest.
The following are the expenses that can be deducted under the standard mileage method: Business miles times the standard mileage rate of .50 cents for 2010, parking and interest.
You should keep track of all of your automobile expenses and log your mileage. If you have a home office, when you leave home and go for business, the distance from home to the business location(s) and back is all considered as business miles. However, if you have a separate office location, then the distance from home to the outside office location is considered as commute miles and it is not deductible.
It is important to keep good records so that your tax return can be properly prepared and so that claimed items can be backed up in the event of an audit. Below are common records that are needed in connection with taxes on your business income. We also want to advise you of the opportunities and pitfalls in the IRS's recent guidance on electronic storage of records.
Keep records of all of your gross receipts. They are needed so that you can properly report gross income from the business activity and self-employment taxes owed on your net earnings. Self-employment taxes are equivalent to social security taxes paid by both an employee and the employer.
You must keep proper track of all expenses that are potentially deductible. To this end, keep track of compensation paid to employees and independent contractors, repairs, rents, taxes and licenses, bank charges, business insurance, utilities, postage and shipping charges, and travel and entertainment expenses, among other items.
On the subject of travel and entertainment expenses, there is some good news. Documentary evidence of business travel and entertainment expenses is not necessary for expenditures under $75.
Keep permanent records of assets that you depreciate. Keep receipts of how much you paid for the property and records showing when you placed assets in service or changed them from personal to business use. Also, keep records of capital improvements.
If you use your car in business, whether you base your deductions on actual expenses or you use an IRS standard mileage rate, there are a number of records that you must keep. They include records of business miles and total miles, records showing when you started using your car in business and its basis, records of actual expenses if you do not use the standard mileage rate, and a number of other items regardless of which alternative you use.
Similarly, very specific and detailed record keeping is required when you use a portion of your home in your business. Records must show the part of the home that is used for business and that such use is exclusive. Records also are needed to show the depreciation and expenses for the business part of the home.
The IRS has issued a revenue procedure applicable to taxpayers who maintain books and records using an electronic storage system. The IRS defines an electronic storage system as a system that prepares, records, transfers, indexes, stores, retrieves and reproduces records by either imaging hard copy records or transfers computerized books and records to an electronic storage medium. The IRS has issued guidelines to insure the integrity of the system and governing controls, inspections and quality assurance. Although the taxpayer may destroy paper records if it has a system within the IRS's guidelines, we caution that potential penalties may not apply if the taxpayer maintains its original books and records, perhaps at a remote, low overhead location.
Hiring Your Children
If you have children that help you around the office or assist you, you can hire them and pay them a salary for their services.
If you are not incorporated, then the salary you pay to your child under the age of 18 is not subject to social security nor payroll taxes. Therefore, most likely you would be transferring income from your higher tax bracket to a zero or a very low tax bracket. The child can also open up a retirement plan for him/herself and make a tax deductible contribution to it. Then the child can use take the money out penalty free to pay for his/her college expenses.
If you are incorporated, the same is true except the salary you pay your child is subject to social security and payroll taxes.
As a sole proprietorship, you pay three different taxes on your net business income: Federal, state and social security taxes.
However, if you incorporate and elect to be an S Corporation, you only pay federal and state taxes on the S Corporation's net income. You do not pay social security taxes. Currently, social security tax is 15.3% on your first $106,800 of net income.
For more information on the different entity types available, please click here.
The money you contribute to a retirement plan for yourself, is tax deductible. There are many different types of retirement plans available to self-employed individuals and corporations. For example: SepIRA, 401(k), Profit Sharing Plan, Defined Benefit Plan and of course a Traditional or Roth IRA.
Therefore, instead of giving your money to the government, why not start a retirement plan for yourself and put money away for your retirement?
Finally, some retirement plans allow you to purchase real estate through them and defer the gain and income until retirement.