Taxes in 2018 for Realtors – Deductions, Documentation, Discussion Are Vital

 

by Heather James

The Tax Cuts and Jobs Act is hitting the proverbial fan and all of us are now preparing to pay the piper.

This time last year I sat down with Richard Staniszewski and we covered the major points of the new code passed in late 2017: new tax brackets, the raised standard deduction, and a bit about itemized state and local taxes. Today, I want to tease out some information I’ve been reading about that applies to many in our industry – sole proprietors, LLCs and S-Corps. I can sum up my findings with three Ds: deductions (research, learn and use them!); documentation (a critical habit to develop); and discussion (meaning: with a tax professional).

But first, a huge caveat: I am not a tax attorney, so what follows in this brief post are my own thoughts gleaned from a wide variety of sources. Please, please, please do not use this as tax advice in any way, shape or form; always consult your personal tax advisor for your own particular situation.

Mother of All Deductions: 20% QBI

Many people are cautiously optimistic about the new Qualified Business Income (QBI) automatic 20% deduction, but it seems to have played out nicely. The IRS issued final rules recently, qualifying a few points which NAR summed up succinctly in late January.

Basically, the QBI – also called a pass through business deduction or the 199A deduction – was an olive branch extended to small businesses. The Tax Cuts and Jobs Act gave a huge rate deduction from 35 to 21 percent for corporations and the government, realizing that 90% of American businesses are not organized as corporations, wanted to offer a similar significant tax cut to partnerships, LLCs, S-Corps, sole proprietors and self-employed independent contractors. Many in our industry fall in this category so the QBI is good news for us.

Instead of providing a special lower tax rate to non-corporations, QBI simply offers a 20 percent deduction on income from “qualified trade or business” at the following thresholds and income levels: for married taxpayers filing a joint return, this income limit is $315,000. For everyone else, it is half this amount, or $157,500. A partial deduction may be claimed for incomes of up to $415,000 (joint returns) or up to $207,500 (everyone else).

There is a very specific list of “specified service businesses” that are prohibited from taking this deduction including health, law, accounting, brokerage services, and consulting. I should note here that because this list was somewhat confusing, NAR did a great job of lobbying to specifically remove realtors from the “brokerage services” identifier, so our industry friends actually can take advantage of the 20% QBI. You can find a great tutorial video on the NAR site explaining QBI in understandable, layman’s terms.


Deductions for the Win

As I digested information, it became clear to me that there are deductions available that plenty of us don’t avail ourselves of. Beyond the obvious and obligatory home office, cell phone and car mileage that most of us know about, you can also:

  • Pay your children through your company. Children don’t have to pay taxes on up to $12,000 and you get that $12K deduction. Just be sure you pay them a reasonable wage for the task they’re performing.

  • Pay medical expenses and health premiums through your company.

  • Set up IRAs for your employee-children. A win-win-win because your business gets the deduction, kids make money and they start tax-deferred (or tax-free) saving.

  • Set up an HSA (Health Savings Account) or if you’re not so healthy, an HRA (Health Reimbursement Arrangement).

  • Self-direct your HSA funds to invest in real estate – some of my sources indicate you can direct funds and use them for a property down payment.

  • Research IRA types beyond traditional or Roth options. Some alternatives that may work for you include SEP (Simplified Employee Pension), a Solo 401(k) or a retirement account for a non-working spouse.

Other notable deductions for real estate agents and other sole proprietors include marketing collateral (open house signs, flyers, business cards), real estate coaching and education, trade association dues and licensing, travel for education and CE credits, home office expenses, gifts (note the next section) and franchise fees.

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Food: Yes – Entertainment: No

One specific note on what is and is no longer acceptable to write off will be a rather large – and I believe unwelcome - change for our industry. Entertainment fees can no longer be claimed as deductions as of January 2018. Not a portion of them. Nothing. Zero. And many folks are going to have a big learning curve with this new policy. Apparently gone are the days of taking a client or prospect to a ball game, Broadway show or The Masters and writing off that expense.

However, meals are still ok. The historic rate of deducting 50 percent of food costs still applies under the new Tax Cut and Jobs Act. If you’re in a situation where you invite a client to an executive suite that includes food, you’re going to be out of luck because that cost is inclusive of the food and entertainment. However, if you purchase food separately and have a receipt for it, that is still allowable.


Document, Document, Document

Which brings me to the last point: whatever you do, document everything you do in detail. Take great notes. Jot down names on receipts. Keep a mileage log. Take it from me, next January you’re not going to remember who you lunched with yesterday. It’s just great form to keep excellent documentation.

The good news is a plethora of technology and apps exist today to help your documentation efforts for mileage, expenses and receipts including Everlance, MIleIQ, and Evernote. Or you can just do it the “new” old-fashioned way and snap a quick photo on your cell phone.

Mostly, The Tax Cuts and Jobs Act of 2017 left a lot of us scratching our heads and shaking in our boots. After doing my personal due diligence and voraciously reading up on the changes and new requirements that are now here, I for one, now have a better grasp of some of the new tax code. I hope my brief summary helps you as well, but again, do not use this as tax advice. Always consult your own tax professional.

*Comments in this blog are in no way, shape or form intended as tax or financial planning advice. Consult an accountant or tax attorney for your own tax planning needs.

 
Heather James