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Are You Paying Too Much In Income Tax?
Feeling overwhelmed by the mountain of receipts from 2003? Before you throw your hands up in dismay, you might want to reframe your thinking. That mountain of receipts can represent thousands of dollars in your pocket. Depending upon your tax bracket and whether or not your state has state income tax, each dollar you deduct can result in a 15-55 cent return to you. To keep as much of your hard earned cash as possible, cross check your 1040 against the suggestions below.
CAVEAT: No matter what you deduct, if you do not show the exact business purpose to which it pertains, the IRS can disallow the deduction. Whether it's a phone bill, entertainment expense, or mileage, you must document the specific business purpose to take the deduction.
You can deduct cash expenses under $25.00
Simply by placing them in your appointment book or Palm Pilot. These little expenses can add up to big dollars over the course of the year for most agents. For example, if you pay 50 cents to park at a meter, $3.00 to make copies of keys, or tip the valet or car wash person $2.00, document the expense on the date it occurred by referencing the amount, the specific client to which the expense pertains, and the nature of the expense.
Auto expense
Many of these are obvious - insurance, gasoline, repairs, license fees, use tax, parking fees and tolls, smog inspections, depreciation, but some are not so obvious. Washes, polish, valet parking, etc. are all deductible based upon the percentage of miles you drove for business.
CAVEAT: Mileage driven to and from the office is NOT deductible, because the IRS considers it commuting. A smart strategy to obtain the maximum mileage deduction is to do a business related activity such as going to the post office, putting out brochures, or calling on a client as the first order of business each day. Driving to an appointment is deductible - commuting to the office is not deductible. Also, be sure to document your mileage in writing.
Depreciation
Many agents don't realize they can depreciate not only their car, but their computer, printer, phone system, digital camera, and other large items. Ask your accountant if it makes more sense to "expense" an item this year (take the deduction in full) or to depreciate it.
Traditional Marketing Expenses (Advertising and Promotion)
Everyone remembers the obvious ones - MLS membership, brochures, postage, printing, and other mailing expenses. Did you remember to deduct for your open house refreshments you serve each week? How about the flowers you brought by for a sick client?
Internet Marketing Expenses
Be sure to include expenses for your ISP (AOL, Earthlink, etc.), computer software, maintenance of your website, as well as any web hosting/design fees you paid. Your digital camera, scanner, and any other costs involved with creating a 360 tour are also deductible as are costs you incurred to set up, maintain, or repair your computer. If you use your computer at home to access the MLS, you can deduct the cost of your ISP and your dedicated phone line/DSL/cable modem based upon the percentage of business use. (Again, you'll have to document the percentage of business use).
Petty cash
Did you deduct for petty cash items such as pens, pencils, keys, note paper, hammer, tape, stamps, etc.? What about the $5.00 you chipped in at the office for a charitable organization? Remember, the IRS accepts "cash" write-offs up to $25.00 if you have a receipt or note the cash amount in your appointment book by date, amount, and business purpose.
Gifts and Charitable Contributions
The IRS limits your gifts to others to $25.00 per person. A strategy to "give more" is to make a donation in the name of your client to their favorite charity. You could also purchase a home warranty and have that deducted from your commission at the closing. Also, if you volunteered for a charitable organization, check with your CPA to see if you can take a deduction for the time volunteered.
Business communication
Your telephone, pager, and cell phone are deductible, but if you also use them for personal calls, you must allocate your deduction based upon the percentage of business usage.
Home office
This deduction can be an immediate red flag for an audit. You can deduct "home office" expenses such as your phone and computer - anything more than that can trigger an audit, even if it's legitimate. (Check with your CPA or tax attorney to determine if this is a smart strategy in your particular case).
Professional Development and Education are also major categories
You can deduct not only the cost of attending the event, but the transportation costs, as well as a percentage of your meals and other expenses incurred while traveling.
Remember, the key is to keep accurate records by noting the client, the date, and purpose on your receipts. Also, always check with your CPA to verify your deductions meet current IRS guidelines. And, if you didn't keep great records in 2003, today's a great day to begin!
To contact Bernice Ross please email her at bernice@realestatecoach.com.
