If you are a small business owner, as most realtors and many mortgage brokers are, every penny of your income counts. This means that you not only want to maximize your revenue, but also minimize your expenses while still taking advantage of all available deductions and tax credits. This of course results in a lower overall tax liability. Unfortunately, most entrepreneurs are not aware of the tricks and tools available to them and end up paying far more taxes than they should. After many years working with hundreds of self-employed people, the two biggest opportunities we see many taxpayers miss are discussed below.
CHANGING YOUR TYPE OF TAX STRUCTURE
When you started your business, one of the first decisions you needed to make was whether you wanted to operate as a sole proprietor, partnership, LLC, S corporation or C corporation. Most of us start out as single-member LLC’s, but as more time goes by, the initial reasons for structuring our business the way we started may no longer be in our best interest from a tax perspective. There is no requirement that we stick with the business structure we initially chose.
Changing your tax structure could result in tax savings of thousands of dollars—even as high as $10,000-$12,000 each and every year. However, before deciding to change your structure, make sure the tax savings are a reasonable tradeoff for the added costs you might incur. You should also reflect on the other reasons that you originally selected your current structure. Not all choices should be based on tax savings. Be careful by seeking out practical and accurate advice.
KNOW HOW YOU’RE GOING TO PAY YOUR TAXES
It is incredibly rewarding to live the dream of owning your own small business, but as you generate more revenue, your taxes can increase to a point where you can quickly get buried in tax debt, along with penalties and interest, and it gets difficult to get caught up and back on track. We see this way too often when dealing with newly self-employed individuals including real estate agents.
While employees pay their taxes with each paycheck via payroll deductions withheld by their employers, there is no such automatic system set up for small business owners. That leaves many with the temptation of delaying making payments in order to maintain liquidity. Many times, people decide not to file their returns simply because they can’t pay their taxes. This is always the wrong choice.
When clients come to see us with collection issues it’s usually because they didn’t pay their taxes when due--and almost always, because of cash flow. They usually say, “just one more sale” or just “one more closing, and I will be able to get caught up.” In many cases, by the time the next sale or the next closing happens, their cash-flow situation hasn’t really changed, and they continue to delay getting current on paying their taxes.
We hate to see clients go through this—we always feel their pain. We work hard to make sure our business owners understand their tax situation and they know what to expect before their tax liability hits them in the face. If we can help you, let us know.