CPA Perry Sherrell has strong advice for Realtors as they prepare their 2014 taxes: don’t be a greedy pig.
“Greedy pigs get slaughtered,” he said to a roomful of Realtors at this month’s Women’s Council of Realtors (WCR) luncheon meeting, held Wednesday, Jan. 7 at the Choo Choo Hotel.
As an example, Sherrell told a true story about a Realtor currently undergoing an IRS audit. The agency started with the person’s 2009 taxes, and because the individual didn’t follow Sherrell’s advice, it then extended the audit into 2010 and 2011. For one year, the agent has already been hit with a tax assessment of $28,000.
“One of the things I told this person to do was get a mileage log. They were flippant and said they didn’t have time to do it,” Sherrell said to a roomful of dropped jaws. “This individual claimed 60,000 miles for that year, and all they provided was a calendar with dates and where they were. The IRS is looking for a contemporaneous log, where you report mileage and tie it to something specific, such as a closing.”
Sherrell said the key when claiming deductions such as mileage – one of a Realtor’s biggest business expenses – is to be reasonable. “If an auditor is looking into a pond filled with goldfish, and he sees a big bass swimming around in there, he’s going to audit the big bass.”
Sherrell, a certified public accountant with Sherrell, Rutherford & Shelley, offered ample advice during his 20-minute talk. One of the points he stressed was making quarterly estimated tax payments.
“Your taxes really bump up when you’re self-employed, so for every dollar of taxable income, squirrel away 35 cents so you can make quarterly estimated tax payments,” he said. “If you’re not making estimated tax payments, those taxes are due Jan. 15.”
Sherrell said Realtors who file for an extension still have to pay their taxes by the mid-January deadline. “An extension is only an extension for preparing your returns. There are always penalties for not paying on time.”
Sherrell also said Realtors will do better on their taxes if they stay organized. At the top of his list: separating personal and business purchases.
“I always recommend you have one credit card you use exclusively for business. Don’t put personal stuff on it,” he said. “And get a checking account you use only for business. That way, when you’re summarizing your receipts, you’ve got them on a credit card statement and a bank statement.
“That’s good advice for those of you who take your garbage bag full of receipts down to the tax office. If you’re paying someone $200 an hour, you don’t want to pay them to add up your receipts.”
Sherrell also recommends keeping records up to date. “How many people in here besides me have their tax information ready?” he asked. “I don’t see a lot of hands. My employees got their W-2s before the end of last year. That’s because I put the ‘a’ in ‘anal.’”
Sherrell also urged Realtors to use a tax professional. “We live and breathe this stuff, just like you live and breathe real estate,” he said. “You don’t recommend people sell their home without a professional, and we don’t recommend people do their taxes without one.”
The Realtors at the luncheon also made note of several other tax tips Sherrell offered:
• If married, the Realtor’s spouse should claim “zero” on his or her W-4 and have extra withholding taken out.
• Keep a current and accurate mileage log. Realtors can’t estimate mileage because they don’t run consistent routes each month.
• Keep bank and credit card statements for seven years.
• Set up an SEP (simplified employment pension) contribution. Sherrell says “it beats an IRA.” Self-employed taxpayers can stash up to 25 percent of their income, up to $53,000, in 2015.
• Hire your children. “You don’t have to pay FICA or Medicare taxes on your children up to age 18. So you can pay your kids up to the standard deduction and then deduct that off your tax return,” Sherrell said.
• Use a home office. Sherrell is especially fond of the Safe Harbor Deduction, which gives self-employed taxpayers a $1,500 deduction for having a home office, and all they have to do is report the square footage of their house and the square footage of their office. There is no audit issue for a Safe Harbor deduction.
• Above all, Sherrell says to be vigilant in the year ahead, as 2015 will be a year of change. “The second phase of the Affordable Care Act is coming, which means there are going to be new forms to fill out on your tax return. A colleague told me he was going to be raising his fees 20 to 30 percent to accommodate the new paperwork coming this year,” he said. “So, stay organized, keep current records, and run yourself like a business, because that’s what you are.”