Tips on Lowering Your Own Taxes Back to Top of Page
It is my experience that most business owners donít get the benefit of the maximum deductions on their tax returns because they donít seek any professional advice. Even so, get a professional who understands what your occupation is all about. In fact, many prepare their own returns or their spouse prepares the return. Several of the tips presented below are beyond the knowledge of the average tax preparer and therefore are seldom taken advantage of by the typical realtor.
- Vehicle Deductions-Your largest expense, usually. So log the miles and the other items. All maintenance and repairs, tires, etc. should be written in the log. Even washings-pay your children to wash the car and put it in the log. Do a fair and adequate job of keeping track of business versus personal (family) use. Accurately claiming your business use is your goal. Be sure to log all items even property taxes if they are applicable. Donít forget insurance. Insurance premiums may be paid by your spouse, from his checking account; they need properly included on your schedule of deductions. Tolls are often forgotten, too. Many business owners use more than one vehicle during the year. If so, the data needs to be put into the log in order to remember and to justify the miles, etc.
- Appointment Log-Keep a diary or some form of daily book reflecting your appointments. This could very well be where you write in the entries for luncheon costs, and costs for supplies, etc. Keep the receipts. The IRS expects to see some record like this to show how many appointments you had in a given time period. It should correlate with your mileage log. One appointment for the week wonít justify 17 trips around the city or county on the mileage log. This record is especially important if you are a high producer and claim lots of mileage and other expenses. In other words, 10 listing appointments and 6 customer appointments showing 30 properties in a week will help to justify 350 miles for the week; or whatever. But, 1 listing appointment and 2 showings wonít correlate to all those miles. So do the job right and have records that support each other.
- Claim All Business Expenses-Almost every dime that you spend for business is deductible. Parking fees, gifts, luncheons attended, postage and other mailing costs, advertising, special deliveries, etc. are deductible. Even your expenses while working for a charity are deductible. If you send lots of flyers, brochures, etc. have your children do the work and pay them. Thatís a legitimate deduction. But you must have a proper record of those items. Put this type of information in your logs. Discipline (self-discipline) is required to take advantage of these types of deductions.
- Sec. 179 Deduction-This is the big one. The IRS allows equipment to be written off in the year of purchase up to certain limits ($24,000 for 2001) even if the use will be spread over several years. This allows computers, printers, palm assistants, cameras and other hardware items to be deducted in the year purchased and/or first used. Therefore, the portion of an item used in your real estate business can be deducted. This includes part of a 4-wheeler if you really use it in business. Letís say you list a lot of farm properties and use it more than 50 percent for that purpose. The deduction is a good one. The same goes for vehicles. Some business owners use trucks because they are easier to get through the IRS without any questions; for this deduction. However, cars are just as valid. Not all preparers will take this deduction and most business owners arenít aware of the allowance for Sec. 179 property.
- Office in Home-If warranted, this may be a significant deduction. You must follow the rules on home-office deductions. This deduction has been clarified and made easier to use in the past several years. The deduction for part of your utilities and depreciation on your home are very nice items to offset against the revenues you earn. Consider having your assistant come to your home-office to work. Thatís an even better justification for writing off part of your home and utilities, taxes, insurance, etc. for business.
- Insurance-You may pay Errors and Omissions insurance. Be sure to claim the deduction. It may be paid for you (from your earnings) by the broker-donít forget it. Likewise, you may have an umbrella policy (special personal liability coverage) and it could very well be a valid item for your tax return.
- Passive Losses (Special Privileges)-If you own rental property and incur a loss in the operation of it, the loss may not be deductible. Because it would be labeled as a passive loss and limited as to its current use. However, as a realtor, you may make an election to claim your right to that deduction on your return. Itís an easy process, but you must be aware of the election and how to claim it on your return. It could amount to hundreds or thousands of dollars on your tax returns.
That Big, Bad Business Plan Back to Top of Page
Many people seem to think the business plan is a new "thing" cast upon them by the financial institutions to give them heartache, indigestion and extra added expense. They think its the bankers way of answering an inquiry for a loan with a "Go away and do a tremendous amount of work and spend thousands of dollars and when you get all that completed, come back and we will talk." The banker says ask your CPA, he'll know what a business plan is and how to prepare it.
So you ask your CPA and he explains what's involved and what it will cost. Sure enough you soon get the understanding that a complete business plan as prepared by the CPA may cost thousands of dollars. If you had that kind of money, you could get by with less of a loan, or put another way-you'll need to borrow more to meet your needs and pay for the business plan. What is a business plan? Its nothing more than a batch of information that a professional consultant would advise you to prepare and take to a banker to justify the bank to grant you a loan. However, it must be polished and whipped into proper form. The bigger the loan request, the more solid information and data needed by the bank. Also the newer the business, the more doubts the banker will have. The more doubts he has, the more that needs to be in the BP to better convince him.
Now let's get down to basics. What's in the usual business plan?
- What you plan to do in this endeavor.
- How long will it take and what will it cost?
- Do you have the required building, equipment and personnel? Are they experienced, trained, etc.
- State known road blocks and how you will deal with them. (Don't be cute and omit this feature. If the banker catches you doing this your credibility is in jeopardy.)
- Resumes on key people. Who will perform the tasks and what expertise do they have. You must show qualifications, experience, know how and proven capabilities. What are your (team) abilities to meet set-backs and still complete the project? Remember teams are better than individuals.
- How much will be earned under Plan A? Plan B? Do you have Plan B? Is it feasible? This shows how thorough you are.
- How you plan for contingencies.
- What are your abilities to make money? And repay the loan. Tip:Do not disclose any strategies and trade secrets. Not even to your banker.
- How much collateral do you have?
- Are you risking as much as you are asking the bank to risk? That's a difficult thing to justify.
- Historical financial statements (2 or 3 years).
- Forecast of 1 or 2 years of how the company will look, on paper while you carry out this mission. Include cash flow. 13)Copies of three years income tax returns of the responsible parties.
The Best Format for Doing Business Is... Back to Top of Page
- Visit the Business Information Center (BIC), in the Mollohan building. Near Fairmont.
- Contact the SCORE group. Same building.
- Obtain a copy of a business plan guide book. Available in software with manual. Work your way through each step.
- Do the bulk of the work yourself.
- Do the leg work and hire a consultant (CPA, etc.) to add the polish and professionalism.
A proprietorship is simply one person operating a business in the least formal method. You just start doing your thing. Rent space; make purchases; sell goods, services, etc. in your own name. Simple isn't it? In this form you have no protection from creditors. Everything you own is at risk. The business creditors can take your personal property to pay for your obligations. That feature is why many persons choose some form that will provide limited or no liability. Until about five years ago, the usual way out on the liability angle was to form a corporation.
Partnerships are usually formed because there are two or more parties at the beginning of the venture. It should be based on an agreement in writing; but often there is no written agreement. Under the theory that two heads are better than one, this is a good way to begin a business. However, many partners soon discover how many ways you can disagree with your business partner. Often people who have been friends for many years start a business together only to learn that they really didn't know each other. If partners can learn to utilize each others talents instead of expecting him to start being exactly like me. I have seen smoothly functioning P'ships where they took two major functions and had each one responsible for a function and neither stepped on the other's toes. Everyone knew how things were arranged. An example is where sales (inside and outside) is one person's responsibility and everything else was managed by the other person. They complimented each other and each one carried his share of the workload and responsibility. A partnership allows a favorable tax situation in most cases. It allows taxes to be paid by the partners and double taxation does not occur.
Double taxation is a problem with corporations. Next we have limited liability companies. They require more formalities (paperwork) than partnerships but not as much as corporations. They provide protection to the owners' personal assets from creditors of the business. Another key feature is that they (LLCs) are taxed as a partnership. LLCs are being formed at a fast pace because they are easier to form, easier to operate, provide liability protection and are taxed at favorable rates. LLCs have only been permitted for about five years. As more people learn about their usefullness they they will become even more popular. Family limited partnerships are even lesser known and are specifically for family owned and operated businesses. Anyone interested should consult professionals for the details and examples of how they can be useful.
What a Vehicle Lease Will Do for (to) You Back to Top of Page
One of our clients leased a vehicle for his insurance business with the following results. See if you think he got scammed. The lease is for 4 years and he will make 48 payments ($585.50 per month) totaling $28,104. At the start of the lease he paid $6,626, to drive the vehicle off the lot. At the end of the lease if the vehicle is in tip-top shape and at or under 60,000 miles, he can purchase it for $9,496 (otherwise he will pay for repairs and extra miles). If he purchases it, thatís a total of $44,226 for a vehicle with a sticker price of $27,525, which he could have purchased for approximately $25,000. If he chooses not to purchase the vehicle, the total is $34,730 for the use of the vehicle for 4 years; which the dealer can sell for approximately $10,000.
Is it any wonder that we see ads everywhere for automobile leases and leasing companies?
We get asked so many times by our clients the following question: ďDo you think itís a good deal to lease a vehicle?Ē Each time I cringe and get a twisted look on my face and answer them with a question: ďDo you want to pay 50% or 60% more than regular price for a vehicle?Ē And then I finish with a comment such as: ďIf you do then you may want to be the proud driver of a new, leased vehicle.Ē
Here are the number comparisons:
- $34,730 is 140% of $25,000
- $44,226 is 177% of $25,000
- $6,626 at the start is 27% of $25,000 and is plenty for a down payment and at 6% interest would have gotten him a monthly payment of $431.51 for the full purchase.
- In fairness, approx. $60 per month of the lease payment is for taxes.