Primarily serving real estate professionals and construction industry business owners, I meet a lot of “Type A” personalities. One thing they have in common is that they like to remain in control. I appreciate their spirited ambitions and encourage them to regain control of the boxes on their tax returns. From my perspective, you earned it, you should decide how to spend it. If you want to overpay your taxes, that’s your choice too.
This time of year, many real estate professionals and other self-employed individuals are paying someone else to prepare and file their income tax returns. The paid preparer will likely ask some follow-up questions after reviewing your information and placing your numbers in the correct boxes on government forms. When the next contact is made, there is usually a long pause before the amount due or overpaid is delivered to you. After catching your breath, you ask what can be done to reduce the amount due. At this point, the options are limited, because history has already taken place and is only being reported in the correct boxes.
What if you could control what numbers went into the boxes on those government forms?
We have previously written about how you receive your income and cash will determine how you are taxed. It is true that not all income is taxed the same and that with proactive tax planning, you may be able to dramatically influence the amount of tax due on the cash you receive. Once your numbers hit the boxes on the government forms, your influence on the outcome is limited.
There are opportunities to reduce the amount of tax due at the time of preparing your tax return for the prior year; however, the greatest opportunities to ultimately reduce the amount of tax paid are initiated earlier. Some of the last-minute tax reducing strategies include qualified retirement plan contributions, catching up on missed depreciation deductions, and designating deposits made into qualified health savings accounts.
As a real estate professional, you are likely considered an independent contractor for the brokerage you are affiliated with and control your schedule. You also control how the cash you take in is going to be taxed. When you control the character of your income, you can greatly influence the amount of tax paid.
Here are four methods we use to reduce the amount of tax paid for our proactive tax planning customers:
- Shifting – Allocating income between different legal entities or individuals in a more favorable tax bracket or structure can reduce the amount of tax paid overall while providing support for those you care about.
- Timing – As a business owner, you can control the timing of when you receive income. Whether it be collecting a commission in the current year or deferring the receipt of the proceeds from a property sale over two or more tax years (ex. December closing, with partial payment received, then remainder received in January), your lifestyle will likely not change because the timing of the cash flow is close, but the tax burden is spread over multiple periods.
- Tax Code – Use the opportunities within the tax code to your advantage. Do you need to subject all your income to self-employment tax? What about the “Augusta Rule”? Are you maximizing your vehicle and business use of home deductions for the administrative office? Qualified plans are not just for retirement, do you have unreimbursed medical expenses that could be considered a benefit expense to your business? As complex as the tax code is, when you work with professionals who can decipher it, you can realize the opportunities to pay less tax.
- Products – Not all cash received is treated equally for tax purposes. Wages and most earned income are taxed at the ordinary tax rates. Sales of appreciated investment property are taxed using the preferred capital gains tax rates. Loan proceeds are generally not taxable at all. What if the loan proceeds were related to a dividend paying investment product like life insurance? Sounds like an opportunity for a tax-free retirement plan like a Roth IRA. What if you had both?
Influence and control may have been reasons for you to enter the real estate profession and entrepreneurship in general. As you further your success, please do not overlook the influence you have on the amount of tax you pay by controlling the numbers that show up in boxes on your tax returns.
To get help with an IRS tax problem, or learn more legal, tax-saving strategies for business owners, contact me at (360) 474-5892 or e-mail me at tate@ensigncpa.com.
Tate Ensign, CPA
T.S. Ensign, CPA & Company, Inc.
P.O. Box 956
Ravensdale, WA 98051
(360) 474-5892
Fax (360) 474-5825
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