Spring is in the air. Temperatures are rising, snow is melting, birds are singing … and tax deadlines are looming! The deadline to file individual tax returns for the 2017 income tax year is Tuesday, April 17, 2018. The deadline to file S-Corporation and LLC returns is March 15, 2018. Keep in mind that all requests for extensions to file must be mailed by those respective deadlines: March 15 for the corporate and LLC returns and April 17 for the individual returns. I know, because for many years I was oblivious to that March deadline and was never penalized. Until one year, I was penalized. And it hurt. And, I will share this with you: “You never penalized me before” is not a good defense with the IRS.
Why do people moan and groan so much about tax time? Of course, it’s about the money. But for many, it’s also about the time and hassle of reliving the prior year to find the data necessary to put the returns together. I get it — you just want to sell real estate, and you don’t want to be an accountant! But taxes are a critical part of doing business, and the buck stops with you. These days, with all the available technology, it isn’t difficult to keep track of the data throughout the year, but you have to set up systems and stick with them. The risk of keeping shoddy records of your expenses translates to lost money and money left on the table by way of missed tax deductions. You work too hard to let that happen, so here are some commonly overlooked deductions as well as some suggestions of how to make sure you can claim them.
Mileage deduction
Number one missed deduction? “Mileage!” blurted tax attorney Ronald E. Jacquart of Jacquart/McCarthy Tax LLC of Elm Grove, when asked. Attorney Jacquart has many real estate licensees as tax clients, and he said, “They just don’t keep track of their mileage!” At 53.5 cents per mile for the 2017 tax year — and 54.5 cents for 2018, mileage can really add up. While mileage from your home to your office is not deductible, virtually all other business-related mileage can be deducted, including but not limited to the following:
- Driving to and from showing appointments. It makes schlepping those out-of-town buyers to 30 homes in three counties a little more palatable.
- Driving by your listings — vacant and otherwise — to make sure snow has been cleared, the lights are on or off, and the yard sign is still up.
- Driving to the coffee shop to pick up coffee for a closing or for a listing appointment.
- Driving to Pewaukee or Madison or Platteville to attend a WRA continuing education course.
All these examples are business-related mileage and, as such, are deductible!
Of course there is always a caveat. The caveat with mileage deductions is that in order to claim mileage as a deduction on your return, you need to have some sort of “writing” to support the mileage, according to Attorney Jacquart. It doesn’t have to be a formal log, with each tenth of a mile jotted down at the end of each trip, but there has to be some way to prove that you drove those buyers 100 miles in a day to look at 30 homes. Calendars, journals and showing reports can back up the claims and, with Google Maps and MapQuest, you can stop staring at your odometer since it’s easy to plug in your start and end points and get accurate mileage counts.
Home office deduction
Number two: Home office. First, according to Attorney Jacquart, to qualify as a “home office,” the space has to look like an office. Your computer and piles of paper on your dining room table will probably not qualify as a home office for tax purposes. But if a separate room is set up with a desk, computer, printer, fax machine and filing cabinet, it may qualify as a home office. As such, it can allow you to claim certain deductions based on its percentage of the total square footage of the home. So, if your daughter’s old bedroom has become your office and it makes up 12 percent of your home’s square footage, you may be able to deduct 12 percent of your home internet, electric, gas, sewer and water bills, garbage collection, landscaping and snow removal costs — things that you typically would not be able to deduct.
In certain situations, and when it makes sense, that percentage of the home’s value may be depreciated. Attorney Jacquart said he doesn’t typically factor mortgage interest and property taxes into the home office deduction because they are already tax deductible. However, with new legislation putting a cap of $10,000 on property tax deductions, any taxes exceeding that cap may be considered in the home office deduction equation.
Coffee deduction
Number 3: Coffee. Yes, you read it right: coffee. Every time you buy a cup of coffee for a client, a hot chocolate for that client’s kid, or lunch for those out-of-town clients with whom you are on a never-ending pilgrimage, keep your receipt! All of those are business expenses and may be deducted. Unfortunately, the wine and beer you drink after you’re done with those out-of-town clients are probably not tax deductible.
“Oh,” you think, “it’s just a cup of coffee, for crying out loud! What’s the big deal?” Think about all that coffee. Really, think about it. $3.00 a cup for four people at a closing for 25 closings a year could add up to a savings of almost $100 in taxes, depending on person’s the tax bracket. Now add in the hot chocolate, doughnuts, lunches and closing gifts — including wine and beer, which is deductible in this case! See what I mean?
Technology deductions
Number 4: Electronics and social media. Subscriptions to social media sites, costs of website development and maintenance and internet service costs, as well as the cost of hardware, such as cell phones, tablets, computers and printers may all be deducted, so long as they are used for business. Be careful not to overstep, however; if you use your phone and tablet for both personal and business matters, you may deduct only the portion attributable to the business. So, if 80 percent of your phone calls and texts are business related, 80 percent of your total phone bill may be eligible for a tax deduction.
Swag and promotional deductions
Number 5. Swag. This one might be a little more obvious, but all the money you spend on marketing and promotional items, such as signs, fliers, keychains, pens, mugs and other promotional materials for your business is tax deductible.
Record-keeping for deductions
If you haven’t kept good records, don’t panic. In this day of digital everything, there are plenty of places to find the information you need — your credit card statements, your online banking account register, and your calendar that can really help with re-creating that mileage calculation! Try to avoid paying business expenses with cash as the one and only receipt you receive after a cash transaction will be your only record of the purchase. Those little snippets of paper are easy to lose!
With regard to keeping all of those records, the IRS website states the following:
Period of Limitations that apply to income tax returns
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Keep records for 3 years if situations (4), (5), and (6) below do not apply to you.
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Keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later, if you file a claim for credit or refund after you file your return.
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Keep records for 7 years if you file a claim for a loss from worthless securities or bad debt deduction.
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Keep records for 6 years if you do not report income that you should report, and it is more than 25% of the gross income shown on your return.
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Keep records indefinitely if you do not file a return.
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Keep records indefinitely if you file a fraudulent return.
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Keep employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.
Written like the tax code, isn’t it? Forget all the mumbo jumbo — play it safe and keep your records for seven years. And remember, don’t just hang on to the return — the IRS already has that; you need to hang on to the supporting documents in case you are ever audited and your claimed deductions are called into question.
Bottom line is that business deductions must be ordinary and necessary, directly related to your business, and a reasonable amount. If you want more information, see the IRS publications in the red resources box. For answers to specific questions, you should discuss all deductions with your tax professional.
Resources
Carol Krigbaum is the managing member of Krigbaum Law LLC, a general practice firm in Whitefish Bay. Carol holds a Wisconsin real estate broker's license and answers questions on the WRA Legal Hotline. Carol is also a member of the Wisconsin State Bar, the Greater Milwaukee Association of REALTORS® (GMAR) and the National Association of REALTORS®. Carol serves on GMAR's professional standards committee and is a frequent presenter on real estate-related topics for the Wisconsin State Bar.