Are real estate agent taxes what keep you up at night? Are you a realtor worried about your tax implications? You are not alone!
On a coaching call with over 200 realtors a while backI was asked these golden questions. I find these realtor tax questions ever-relevant, as more and more realtors and real estate agents keep asking me these questions over time.
So… these questions may be a refreshal for some of you and may be extremely knowledgeable for those of you that are new here.
1. When filing tax as a Realtor, can I deduct clothes and dry cleaning?
Simply answering this… No..
Clothes and dry cleaning, unfortunately, are not an expense that you can deduct when filing your income.
In a past court case,a Quebec female lawyer claimed her suits as an expense for work and got disallowed by the court. The Judge in the case cited that the requirement to wear dark-colored clothes at her workplace does not mean that she cannot wear these outfits elsewhere. Hence, deduction was not allowed.
There was also another court case whereby a financial advisor claimed a deduction of $8,400 he spent on buying custom suits to go with his new office.
The Judge in this case, similarly, disallowed this deduction, based on the same reasoning.
2. Can I deduct sports or any seasonal events tickets when I file tax as a Realtor?
The answer here again is no, but there is an exception!
The exception is that if you are taking your client to a specific sports event (with the intention of discussing business and generating additional income), then you can deduct the expense.
But the deduction is limited to 50% (similar to the meals and entertainment expense) to eliminate the personal entertainment portion from the deduction.
Similar to all other expense deductions, you’re required to document the name and your business relationship that you have with him/her.
3. Can I deduct any conference expenses from tax ?
If you are self-employed as sole proprietor or partnership, you can only deduct up to two conferences you attend during the year.
If you are a Realtor in a corporation, this rule does not apply to you.
4. How do I do a cash flow forecast?
As I shared during my call with around 200 realtors, I usually start doing cash flow forecasts based on historical information from a prior year.
You would take all the expenses you incurred from the same period the prior year, and project it to the upcoming year.
For expenses that you know you are going to increase, adjust them accordingly.
For example, if you hire a new marketing full-time employee and it’s a newly created position, the expense would not have been captured in your prior year expenses. Therefore, you would adjust the payroll accordingly.
If you know that you are committed to a new marketing campaign that would cost you $3,000 a month, make sure you adjust your forecast accordingly.
Alternatively, let’s say you spent thousands of dollars last year on renovating your new office. This year, you won’t need to do any., So, you would adjust the current year’s cash flow forecast accordingly.
From here on, I go back to the revenue.
For realtors out there, I will start by making the cash flow projection based on prior year income.
I will then do scenario analysis, with best case scenario and worst case scenario to project for upcoming year cash flow.
This case, you can get to learn more about your business, be prepared for all the downtown and make a business decision with ease.
Alternatively, you can speak to your accountant and request for a cash flow statement from prior year to help you get a better understanding and head start of your following year’s cash flow.
There’re more than one way to crack an egg. There’re many different ways to prepare your cash flow forecast and perform additional analysis to stress test your business. Be sure to talk to a professional accountant who understands your situation that can explain to you in layman terms how it works.
5. Should I hire my assistant as a subcontractor or employee?
If you hire someone as an employee, you are an employer, so you are required to make CPP and EI contributions.
You may also be required to pay severance when you let go of the employee.
You are also required to submit source deduction remittance on a regular basis to CRA. Initially, you are required to do so on a monthly basis, unless you meet the quarterly remittance requirement. In exchange, the employee can claim employment insurance (EI) if he/she is let go.
On the flip side, hiring someone as a subcontractor may save your employer a portion of CPP & EI.
The subcontractor can also deduct expenses that he incurs to earn the income, but he loses the opportunity to claim EI because he’s primarily self-employed.
It is never a decision made by you; preferably it is a question of fact based on the following criteria:
- Intention: Are both parties intend to work as an employer-employee relationship? Or subcontractor? This can be an agreement signed representing employment or a subcontracting agreement.
- How much control do you have? Do you control exactly what and how and when the other party works? The more power you have, the more likely it is an employer-employee relationship.
- Who supplies the tools & equipment? Imagine hiring a plumber to fix your water problem, and chances are, he comes in with his tools. He’s a subcontractor. If you hire an employee, the employer provides the tools to perform the work.
- Can the worker subcontract work and hire an assistant? If he has the freedom to subcontract out the work, that’s also an indication the worker is a subcontractor.
- Opportunity for profit? Subcontractor = having your own business. If you are your boss, this means that you can risk losing money. If the worker has no way of losing money, chances are, he is more an employee than a subcontractorFinancial risk? Does the worker require to pay ongoing expenses that would not get reimbursed? Employee expenses are generally reimbursed by the employer whereas subcontractor expenses will not.
Make the decision based on the above criteria when hiring. It can save you some headaches when you get audited.
6. Should I incorporate as a Realtor & what are the tax advantages?
If you read my recent blog post, you would have known that I am a big proponent of using corporate structure mainly for its flexibility and tax deferral opportunities.
If you incorporate, you can deduct more than two convention expenses during the year.
If you incorporate, flexibility can be built in to split income with spouse or adult children.
If you incorporate, you may be able to sell your business (active business not rental portfolio) sheltering a significant amount of capital gain tax.
If you incorporate, you may be able to invest in the corporation structure much faster, even with the tax changes imposed earlier this year!
Of course, like any tax strategies, there are some cases that we don’t recommend incorporation. It all goes back to your specific situation.
Be sure to talk to someone that knows realtor business and real estate investment to discuss your strategy.
Until next time,
Cherry Chan, CPA, CA
Real Estate Agent Accountant