Jacqueline Kyo Thomas
Did you know that the only thing worse than paying taxes is paying taxes when you’re self-employed? The entire process is confusing, overwhelming, and rage-inducing.
But it doesn’t have to be.
In this post, we’ll give you tax strategies to better prepare you for tax season (and when you’re working for yourself, it’s always tax season). But first, a disclaimer: I am not a tax professional. This post is not tax advice, and is for informational purposes only. I highly recommend that you hire a licensed professional to help you navigate your taxes, especially if this is your first year working as a self-employed individual.
Ready, set, let’s get started.
Keep Records
When you work for yourself, it’s important to keep a record of every purchase that you make. But don’t go crazy trying to save every paper receipt. There’s an app for that!
Use Expensify to manage your receipts. All you need to do is take a picture of your receipts with your smartphone and then let Expensify do the rest. It automatically transcribes your receipt image so that you can easily keep track of what you spent and where. This will come in handy when you need to make the deductions that we’ll discuss below.
Be Careful With Expensing Client Gifts
You give gifts to your clients because:
A) You’re a giver B) You want to leave a good impression to get more referrals C) You like tax deductions D) All of the above
Giving gifts is almost always a good idea, but it’s even better when you’re in business for yourself. You can be charitable while also deducting from the taxes that you owe.
That said, you can only deduct up to $25 per person per year, so keep that in mind when buying gifts for your clients.
Track Your Mileage
Let’s talk about mileage. Surprisingly, this is an often-overlooked tax deduction. Whether you’re hopping in your car to show houses, run business-related errands, or plant yard signs, you should consider tracking every mile you drive for tax purposes. Over a year’s time, the mileage adds up.
In addition to writing off the miles, you should also include the date, the place, and the purpose of your trip.
But adding this info by hand can get tedious. Expensify to the rescue again! Instead of tallying your mileage manually, you can use Expensify as a GPS mileage tracking device. It will automatically log how many miles you drive (and where) each day so you don't have to do it yourself.
Try the Actual Cost Method
There are actually two ways to deduct your car usage. Instead of tracking your mileage, you can take advantage of the actual cost method. With this method, you tally the actual cost of operating your vehicle in the previous year. This includes everything you’ve paid to operate and maintain your vehicle including:
- Gas
- Insurance
- Loan interest
- License fees
- Repairs
- Maintenance
- Tolls
- Parking
You can even deduct the car’s depreciation. And some of these expenses can also be deducted while using the mileage method.
Remember that if you use your car for both business and personal use, you cannot deduct 100% of the expenses that you incur. You can only deduct a percentage of those expenses based on how often you use your car for business purposes.
It’s also important to note that you can’t do both the mileage and the actual cost method at the same time. Figure out which one makes the most sense for your needs. If you’ll log a lot of miles because you cover a large area, it may be better to opt for the mileage method.
By the way, you can switch between the mileage method to the actual cost method from year to year, but their may be certain restrictions and your depreciation deduction may be reduced. Track both ways, and have your CPA compare the two methods at the end of the year to see which saves you more on your final tax bill!
Deduct Office Expenses
From CRM software to computers to coffee tables, you can deduct technology, equipment, and furniture expenses.
When it comes to items like computers, there are two ways that you can deduct your expenses: You can deduct the expense outright in the first year of having it, or you can deduct the item’s value as it depreciates over its useful lifetime.
If you use the items for business and personal use (which is often the case with computers), remember that you can only deduct the amount that you use for business.
Remember Your Miscellaneous Business Expenses
In addition to the big purchases, you’ll also need to make small purchases that definitely add up. I’m talking about business cards, pens, stationery, photocopies, and other consumables. Be sure to keep track of those smaller buys so that you can deduct from your taxes owed.
Deduct Your Business Travel Expenses
Do you go out of town for business-related meetings, events, or conferences? Be sure to deduct those expenses from your taxes.
Lodging, transportation, laundry, and phone calls are all fully deductible. That’s easy.
When you start deducting entertainment and business meals, things get a little more complicated. You can’t deduct 100% of your business meals because, hey, you’ve got to eat anyway, so how much of it is personal and how much of it is business? According to IRS rules, you can deduct 50% of your business meal expenses.
While you used to be able to deduct client entertainment, that’s no longer an option. There may be some other considerations, so I highly recommend you discuss this deduction with a tax professional. And keep those receipts handy, just in case!
Deduct the Right Amount for Food
Speaking of food, you can deduct meal and food costs when you’re home and not just when you’re traveling for business.
Business meals with clients are 50% deductible, whether you're at home or away. You can also deduct 50% of the amount that you spend on office snacks or meals. If you have a company party for you and your assistants, you can deduct 100% of food costs. The same goes for open houses where you provide refreshments to the public.
Don't Wait Until the Last Minute
Whether you’re working with a professional or you’re doing your own taxes, remember this: Don’t wait until the last minute to do your taxes.
None of us like to part with our earnings, but procrastinating won’t make it any easier. In many cases, it may make things worse. You will likely miss obvious deductions and end up paying more in taxes than you would otherwise.
Tax preparation should be done year-round. In fact, if you’re self-employed and expect to owe more than $1,000 in taxes for the year, you should pay your estimated taxes quarterly, on April 15th, June 15th, September 15th, and January 15th. If you don’t, you’ll be met with an underpayment penalty and an interest charge.
Final Thoughts
Taxes don't have to take a huge bite out of your profits. Using the above tips, you can get ahead of the tax game and grow your real estate business more effectively.
Before you go, check out these related resources: