By Riki Markowitz
There comes a time in every professional’s life when he or she contemplates whether hiring a professional accountant is necessary. Unsurprisingly, this question comes up more from those in lower income brackets because there’s less money to spare on what can seem like an extravagance, especially since there are so many sophisticated, seemingly easy to use tax software products on the market. But when RLA asked a few local CPAs if they thought real estate professionals should hire an accountant, without hesitation, they all answered, “Absolutely.”
According to Aaron Farmer, the 2016 Austin Board of REALTORS (ABoR) president, most REALTORS in Texas are independent contractors, which means that they’re responsible for paying their own taxes. Even if an agent has business cards with the name of Austin’s largest real estate company stamped at the top, as long as that individual fills out a 1099 (not a W-9), she’s responsible for filing and paying her own taxes. “Independent contractors are obligated to pay income taxes and self employment taxes, which includes social security and Medicare, among others. So if you’re in the 28 percent bracket, earning around $60 to $80k per year, that’s about 35 percent to 40 percent of your income,” says Barbara R. Prashner, a CPA (certified public accountant) with 25 years experience. “Taxes are the biggest expense of your lifetime.” For any other transaction that large, who wouldn’t hire a professional guide them through the process?
Hiring a tax professional is actually more crucial for agents who only earn enough on the few deals they close per year to get by. One big reason to work with a CPA is because of how much money it can save in the long run. “When you’re looking to shave a little bit off every year over the course of your lifetime, that’s the difference between a nice retirement and a not so nice retirement,” say Prashner. When you hire a CPA, not only can you rely on an expert to prepare your yearly return, but he or she will also be sure you’re taking advantage of every deduction you’re entitled to.
The number-one reason why people pass on hiring an accountant is cost. For every average-earner, every penny saved is a penny earned – and one you will owe taxes on. So it’s not surprising that the first question most accountants hear from new clients is “How much?” Unfortunately, there is no easy answer to this question. “I can generally provide a fee range after I consult with a potential client,” says Prashner. But unless she knows a few keys facts above and beyond gross income, “there are too many variables.”
Finding the right CPA
In most fields, a consumer can compare prices and services. For accountant shopping, it’s not that simple. So rather than looking for the CPA who has the best rate structure or most Yelp stars, Farmer has more of a process-of-elimination philosophy. An accountant who promises specific costs or refunds without knowing anything about your earnings is a red flag. “Also, be very weary of anyone who tries to sell you on schemes or structures that guarantee big savings or profits.”
Getting a referral from two or three trusted colleagues is how most folks – in any industry – find a knowledgeable CPA in their preferred price range. Farmer adds that it’s best to find someone who dedicates a portion of their practice to full-time real estate professionals because she will be more familiar with tax laws for this industry.
You have an accountant, now what?
Just because you’ve hired a CPA does not mean you’re off the hook when it comes to managing your financial records. Handing your tax preparer a shoebox of receipts can up your document preparation costs, but also, neglecting to provide certain receipts and paperwork puts you at risk for disqualifying yourself for a long list of deductions that you’re entitled to.
A deduction is an expense that lowers your taxable income. So if you pay $650 for your brand new Texas real estate license, your accountant will deduct that amount from your taxable income, thereby reducing the amount of money you will be taxed on. By overlooking a deduction, you’re essentially allowing yourself to be double-taxed on that item.
Some of the most common deductions agents and brokers can claim are commission income; expenses for advertising and promotions; vehicles expenses, including repairs and insurance; your business license and professionals fees; and a variety of equipment costs, from your internet connection to your tablet. But there are many more deductions that agents don’t even realize they qualify for.
Farmer said he knew a group of agents who went on a real estate education cruise. So along with stops at St. Maarten and Barbados, his colleagues spent a few days at sea taking classes and attending conferences – making the cost of the voyage eligible for a deduction. Since agents rely on repeat business and referrals, it’s not unusual for them to host client appreciation get-togethers. Those, too, are deductible as a business expense. And to be sure you’re properly deducting every box of donuts you buy for an open house and every mile you drive while showing homes to a potential buyer, you must present a receipt. Farmer has low-tech tax organization hack: Buy an accordion folder and stash your receipts by category – automobile expenses for gas, insurance and repairs; professional expenses for your classes, conferences, and license fees; and for expenses you’re unsure about, just ask your accountant. That’s what you’re paying for. RL