Tax Preparation Is a Year-Round Activity for Real Estate Business Owners – Here’s How to Prepare

If you’re running a home-grown or home-based real estate business, you’re most likely running it from the road. Whether you’re picking up hors d’oeuvres for an open house, meeting clients for coffee, or driving to a private showing, running a real estate business means spending a lot of time away from your home base.

Along the way, you’re likely to accumulate a higher than average amount of paperwork than many home business owners in other industries. In addition to the important records for selling homes, such as mortgage approvals and inspector reports, you’ll also rack up stacks of receipts. Though many of these purchases may be relatively small – $10 in gas here, $14 in printer fees there – over the course of the year, they add up.

If you shove receipts into your glovebox, wallet, or center console thinking that you’ll remember them later, you could be setting yourself up to lose out on significant tax deductions for a variety of expenses. On any given day, you may accumulate receipts and invoices for tax-deductible expenses such as:

• Offline Marketing Expenses: Fees for printed signs, flyers, business cards, and direct mailers to market new properties
• Online Marketing Expenses: Investment in professional web development, design, and marketing to attract new clients
• Professional Development: Registration fees for coaching, training, and education to keep your skills sharp
• Licensing: Fees to renew your license to legally operate as a real estate agent
• Transportation: Cost of gas, parking, and repairs while you’re using your vehicle to travel to meet clients and view properties
• Ordinary and Necessary Maintenance: Purchases for supplies and equipment to make repairs on rental properties

With the passing of the 2018 Tax Cuts and Jobs Act, the National Association of Realtors (NAR) expects that many real estate professionals will face a bevy of new challenges. In particular, the NAR projects slower growth in home prices of 1-3%, which means your top line revenue may take a hit. With new challenges to your real estate business, you’ll want to make sure you can capture each and every tax deduction available to you—which means you may need a new strategy.

Why Home Business Owners in Real Estate Should Consider Cloud-Based Accounting Tools

You wouldn’t show a property without making sure it was clean and you wouldn’t schedule an open house without advertising it. Keeping track of your expenses is just as essential as marketing and advertising, which means that the best way for many real estate businesses to prepare for tax season is to shift their mindset. Instead of thinking about expenses as an afterthought, think about them as a competitive advantage you can reap by having easy to use systems in place. One of the best systems you can use is a cloud-based accounting software. Here are three reasons why:

Make it Easier to Remember to Track Expenses: Instead of putting your tax-deductible receipts into the “I’ll deal with the later” pile (and then never dealing with it until you absolutely have to) isn’t enough. Haphazardly tracking receipts in a spreadsheet one month and forgetting the next month isn’t enough. But the best way to overcome this isn’t by having a better memory – it’s by having a better organizational system so your business is in “tax preparation mode” all year round.

Cloud-based software can be accessed on any device with an Internet connection, including your phone. And cloud-based accounting software with a capture feature can allow you to snap a photo of every receipt immediately after you make your purchase. When you use a tool like this, it’s much easier to take a picture to document your expense than to wait until the end of the quarter or month to track down your receipts.

Organize and Categorize Expenses: The IRS allows you to deduct some expenses but not others. Expenses that are “ordinary and necessary” to run your business are generally tax deductible. For example: you can deduct expenses to maintain a rental property, but not to improve one.

If you wait until the end of the year to remember what each expense was for, it will be nearly impossible to accurately recall which expenses are associated with which categories of purchases. But if you use a cloud-based accounting software, you can both capture and categorize a receipt as you make the purchase. Some tools will allow you to create folders for different purchases to stay organized.

Reduce Auditing Risk (and Pain): The sheer number of possible purchases for tax-deductible expenses means that real estate business owners can be at a higher risk of being audited. Proceeding through an audit with only a box of paper receipts can be a time-consuming and risky endeavor.

Fortunately, one of the benefits of a cloud-based accounting software is that you can maintain a precise paper trail of each and every tax-deductible purchase. If your business is audited, you will be able to justify your expenses.

What to Look For When You’re Selecting a Cloud-Based Accounting Tool

There are a number of different types of cloud-based accounting tools for a variety of different purposes. To make sure your real estate business is ready for tax season, you’ll want to make sure that the tool you select allows you to easily capture expenses while you’re out and about, that you can easily organize and categorize, and maybe even with multi-user account access so you can allow an accountant to have easy access preparing your return.

Many tools come with a free trial, which gives you an opportunity to test out a tool to see what it’s like for you. The tool you choose just might save you significantly at tax time.