Tax Deductions You Should Not Forget

Now that the holidays are approaching, it dawns on me that I need to organize my business deductions.  Of course there is nothing like procrastination.  However, to help get myself organized and to remind me of the deductions that I can take, I came across this article.  I think it will be helpful to me and others

Deductions You Should Not Forget

1. Introduction

If you are a real estate agent or broker, a landlord, a professional property manager, a developer or are in the construction business, then the IRS considers you to be a Real Estate Professional. As such, you are privy to claim a number of tax deductions that the general public can not take advantage of.

The following are the categories of expenses that are typical to business professionals and examples that are specific to the Real Estate Professional.

a. Auto Travel           

Your deductible auto travel expenses are based on the number of qualified business miles that you drive during the year.

Your trips between home and work each day or between home and one or more regular places of work are considered commuting miles and thus are not deductible.

However, travel between business locations or daily transportation expenses in going between your residence and temporary work locations are deductible and thus should be counted as business miles.

Examples of deductible business mileage is travel to and from:

Client meetings
Escrow
Lenders
Showings
Caravans
Continuing education classes or programs
Out-of-town business trips

In addition to the mileage deductions, out-of-pocket expenses for parking meters, tolls and valets are 100% deductible. Make sure to keep receipts for all car operating expenses: gas, oil, repairs, insurance, car washes, car loan interest, vehicle registration, etc.

Make sure to document your business miles in a record book or calendar. Try whenever possible to:

(1) Identify the date and business purpose of each trip;
(2) Note the name of the destination to which you traveled;
(3) Record the number of business miles traveled; and
(4) Record your car's odometer reading at both the beginning and end of the tax year.

When considering getting a new car, contact your tax adviser to review the tradeoffs of leasing versus buying. And always make sure to keep a copy of your auto purchase document.

b. Out-of-Town Travel

As you may or may not know, expenses of traveling away from home, overnight, on employment-related and/or continuing-education trips are generally deductible. Your home is considered to be the entire city or general area where your principal place of employment is located.

Out-of-town travel expenses include:

Meals
Lodging (identify separately from meals), tips, laundry and telephone calls (including home)
Airfare, car rental, parking, taxi, train, bus and subway
Bell captain and porter
Bridge and highway tolls
Any other ordinary and necessary expenses

Document away-from-home expenses by noting:

(1) Date
(2) Destination
(3) Business purpose of the trip

Keep a detailed record of your expenses as you incur them. Always list meals and lodging separately in your records as different deduction rules apply to such expenses (i.e. meals are only 50% deductible).

Receipts, generally must be acquired and retained to support each deductible business expense. However, if the business expense is less than $25 (raised to $50 for years after 1995), a receipt is not necessary if you record all the information in a diary.

c. Professional Fees & Dues

Dues paid to professional societies related to your profession or business are deductible. Therefore do not forget to keep track, document and deduct your dues and fees paid to:

Associations
Chamber of commerce
Realty board
City business license
Any other organizations directly or indirectly related to your profession or business.

d. Telephone Expenses

The basic local telephone service costs of the first telephone line provided in your residence are not deductible. However, toll calls from that line are deductible if the calls are business related. The costs (basic fee and toll calls) of a second line in your home or any other service are fully deductible, if used exclusively for business.

Therefore do not forget to keep track, document and deduct the costs of:

Fax transmissions
Paging service
Coin operated pay phone usage
Telephone credit card calls
Cellular service and business related toll calls on your home phone.

e. Office in the Home

Should you qualify for this deduction then it is important that you document and keep track of the following expenses:

Business area of the home in comparison to the total area of the home
Home mortgage interest expense
Real estate property tax expense
Homeowner's insurance cost
Repairs and maintenance expenses directly and/or indirectly related to your home office
Cost of household utilities such as gas, electricity and water

f. Continuing Education

Educational expenses are tax deductible under either of two conditions:

(1) Your employer requires the education in order for you to keep your job or rate of pay; or
(2) The education maintains or improves skills in your profession.

The Real Estate Professional typically takes courses to satisfy the second criteria. For some professionals, such as Realtors, brokers, contractors and some property managers, their basic licenses require them to take and/or pass continuing education courses on a regular periodic bases.

Should you qualify for this deduction then it is important that you document and keep track of the following expenses:

Correspondence course fees
School material, supplies and textbooks
Seminar fees

g. Business Supplies

All business professionals incur expenses that are ordinary and necessary in their normal course of work. If these expenses are not reimbursed by an employer or a client then they are generally tax deductible.

The following are examples of ordinary and necessary business supplies:

Briefcase
Stationary
Computer software and supplies
Fax supplies
Film and processing
Greeting cards
Lock boxes, keys and locksmith
Map books
Photocopy expense
Postage, shipping and freight
Any number of other office expenses

h. Miscellaneous Business Expenses

In addition to business supplies, most business professionals incur other miscellaneous business expenses that are ordinary and necessary in their normal course of work. If these expenses are not reimbursed by an employer or a client then they too are generally tax deductible.

The following are examples of ordinary and necessary miscellaneous business expenses:

Advertising
Signs, flags and banners
Appraisal fees
Attorney fees
Bank charges
Clerical services
Computer database subscription fees
Courier service
Equipment repair
Finders fees
Gifts and flowers
Insurance premiums (i.e. Errors and Omission and Liability)
Legal and professional services
Multiple listing services
Open house expenses
Referral fees
Repairs to sell listed property

i. Interest

Mortgage interest on business personal and real property (other than a personal residence) and interest paid on borrowed funds used to pay for ordinary and necessary business expenses is generally tax deductible.

The following are examples of ordinary and necessary interest expenses:

Credit card finance charges used to pay for qualified business expenses
Line of credit interest expense used to pay for qualified business expenses
Any other interest expense paid that can be traced to the real estate professional's expenditures

j. Meals and Entertainment

With the exception of Club Dues, any and all reasonable, necessary and ordinary meals and entertainment expenses sustained in the course of business are tax deductible subject to a 50% reduction.

Examples of ordinary and necessary meals and entertainment expenses are:

Restaurants
Shows
Sporting events
Theater

k. Equipment Purchases

The costs of business assets which are expected to last longer than one year and that cost more than $100 are normally deducted differently on your tax return than are other recurring, everyday business expenses like business cards, office supplies, etc. Therefore it is important that the Real Estate Professional record expenditures to procure such assets separately.

Examples of such assets are:

Answering machines
Calculators
Cameras
Computer equipment
Copy machine
Fax machine
Pager
Recorder
Telephone

Although the above expense categories and examples are frequently used to offset income generated and/or gross receipts received, it is also very important that Real Estate Professionals be aware of other deductions that they can benefit from.

It is especially important for the Real Estate Professional who materially participates in the operations of rental real estate to be aware that ever since 1994 they are no longer subject to the Passive Loss Rules.

This means that they are no longer limited in their rental loss deductions. The $25,000 deduction loss limit and the $100,000 to $150,000 phaseout of losses rules have been repealed for qualifying professionals.

RealTax professionals have the competence and experience to ensure you take advantage of all your deserved tax deductions. We specialize in real estate oriented accounting, tax planning, tax preparation and related services. We invite you to contact us with regard to your specific needs.

By Joe Mandelbaum
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