I recently met with a new client to sort out his tax and corporate issues related to his various real estate endeavors. To be sure, this entrepreneur was missing some key concepts that many real estate investors miss regularly. Walking him through Section 162 of the Tax Code helped him understand that there was a world of business tax deductions that he never thought of before.
To elucidate this point, I am going to explain what Business Deductions are according to the Tax Code. The following Code section is vital to real estate investors — I encourage all investors to meet with their attorney or CPA about business deductions related to running your business.
Business Expenses According to the IRS
(a) In General There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including—
(1) a reasonable allowance for salaries or other compensation for personal services actually rendered.
(2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and
(3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
For purposes of the preceding sentence, the place of residence of a Member of Congress (including any Delegate and Resident Commissioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts expended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes. For purposes of paragraph (2), the taxpayer shall not be treated as being temporarily away from home during any period of employment if such period exceeds 1 year. The preceding sentence shall not apply to any Federal employee during any period for which such employee is certified by the Attorney General (or the designee thereof) as traveling on behalf of the United States in temporary duty status to investigate or prosecute or provide support services for the investigation or prosecution of, a Federal crime.
What This Means for You
This is Congress’ way of saying that businesses can deduct expenses that are necessary to operate a trade or business. A short list that business owners need to consider includes:
- Auto expenses (actual or standard mileage)
- Expenses of going into business (limited to $5,000 in the first year, but after the business is operational, advertising, utilities, rent, and repairs are deductible)
- Books, legal, and professional expenses
- Travel expenses
- Business travel
- Charitable contributions
- Taxes (sales tax, excise and fuel taxes, employment taxes, state income taxes can be itemized on your federal return, real estate taxes as well as assessments)
- Education expenses for things such as continuing education or maintaining your license, if applicable
- Advertising and promotion (websites, business cards, yellow page ads, etc.)
- Pass-through deduction (sole proprietorships, partnerships, S corps, LLCs, and LLPs can deduct up to 20% of their net income if they qualify)
Additionally, many overlooked deductions are missed regularly, including:
- Bank service charges
- Business association dues
- Business gifts
- Business-related magazines and books
- Casual labor and tips
- Casualty and theft losses
- Coffee and beverage service
- Consultant fees
- Credit bureau fees
- Office supplies
- Parking and meters
- Petty cash funds
- Seminars and trade shows
- Taxi, bus, and Uber-type fares
All businesses are only required to pay taxes on what they owe. Thus, make sure to track the expenses of running your business. At the end of the year, it will brighten your outlook to know that those dollars spent to run your real estate business are dollars well spent. As I have said previously, meet with your lawyer or CPA to discuss these and other deductions to sharpen your true tax owed.