Plan Now, Save Later
Follow these tax planning tips to reduce this year's business taxes.
At the beginning of each year, company
owners and individual practitioners should review their business
practices to determine if they are making the most of their tax
deduction opportunities. Knowing which travel, meal, entertainment,
home office, and education expenses to deduct and what records to keep
can help commercial real estate professionals save money and plan for
Travel, Meals, and Entertainment
real estate professionals often travel to meet with and entertain
clients. While these costs add up over the year, many of the expenses
can be deducted at tax time.
Generally, taxpayers may deduct travel expenses incurred while away
from home conducting business if the expenses are ordinary, necessary,
and not lavish or extravagant under the circumstances. These basic
expenses include air fare, lodging, meals, tips, local transportation
from the lodging to the temporary work site, phone calls, faxes,
cleaning, and laundry.
Taxpayers also may deduct travel
expenses paid or incurred for spouses, dependents, or other individuals
accompanying them on business travel if the other persons are the
taxpayer's bona fide employees; the other persons' travel is for a bona
fide business purpose; and the other persons' expenses are otherwise
Adequate records or corroborating evidence
must provide details to substantiate the expenses. In addition,
taxpayers must maintain documentary evidence, such as receipts, for
lodging and expenditures of $75 or more. There are no annual
limitations on how much a business owner can deduct for travel.
Meals and Entertainment. Individuals may deduct 50 percent of business meal expenses and directly related business or associated entertainment expenses.
percentage limitation applies to meal and entertainment expenses
incurred while traveling away from home for business; entertaining
customers at the taxpayer's place of business, restaurants, or other
locations; attending business conventions or meetings; or having
business lunches at clubs. Meal tips and taxes, entertainment cover
charges, and parking also are subject to the limit.
gifts are deductible up to $25 per recipient. Deductions are not
permitted for most club dues, including those for business, social,
athletic, luncheon, sports, airline, and hotel clubs.
To deduct expenses for travel, entertainment, gifts, and business
discussions directly preceding or following associated entertainment,
taxpayers must retain adequate records and documentation to
substantiate the following elements:
separate expense amounts other
than incidental expenses (which may be aggregated daily if set forth in
reasonable categories such as meals, travel, etc.);
- business discussion durations;
- dates entertainment or business discussions took place or dates gifts were given;
- departure and return dates for trips away from home and the number of days away that are spent on business;
- travel destinations, entertainment locations and types, and places at which business discussions are conducted;
- business reasons or benefits derived from travel, gifts, or entertainment; and
of persons entertained or gift recipients, including names, titles, or
other designations that establish their business relationships to the
To eliminate some record keeping,
the Internal Revenue Service allows taxpayers to base business travel
deductions on a per-diem rate; however, the rate may not exceed the
destination's established IRS per-diem rate, which can be found on the
IRS' Web site at www.irs.gov.
To avoid paying for expensive office space, many commercial real estate
practitioners choose to work in a home office, which can provide some
generally can deduct expenses for the business use of a personal
residence if the space is used exclusively and regularly as the
principal place in which the taxpayer engages in business; as a place
of business for meeting clients or customers; or in connection with the
taxpayer's business if he is using a structure unattached to the
dwelling. Employees further must show that the home office is used for
their employers' convenience.
A home office qualifies
as a taxpayer's principal place of business if it is used to conduct
the business's administrative or management activities and if the
taxpayer doesn't conduct a substantial amount of such activities at
another fixed location. This definition enables many taxpayers to
deduct the cost of traveling to and from their homes to other locations
where they conduct business.
Business owners whose
employees perform administrative or management activities or those who
conduct an inconsequential amount of those duties at other fixed
locations are not automatically prohibited from taking the home-office
deduction. However, employees do not have this flexibility. The fact
that other space at a fixed location is available for administrative
activities is relevant in determining whether an employee uses a home
office for his employer's convenience.
expenses only can be used to offset the business's gross income.
However, any deductions this limitation does not allow may be carried
forward to a succeeding year.
For example, an
accountant regularly and exclusively uses one room of her home to
oversee her real property investments. If only one piece of property is
involved, the deduction could be denied due to lack of any systematic
or continuous activity. But if she owns and manages several pieces of
real property, her activity probably would be considered a distinct
business, and, if all of the other requirements were met, the deduction
would be allowed.
Commercial real estate is an ever-evolving business; one of the best
ways to stay current on technology and industry trends is to take
continuing-education courses. Several federal and state tax programs
can help mitigate advanced education costs, including Hope Scholarship
credits, Lifetime Learning credits, tuition and fees deductions,
student loan interest deductions, Internal Revenue Code Section 529
plans, and Coverdell education savings accounts.
these options, only the IRC Section 529 plan does not have any income
limitations. It allows taxpayers to contribute $55,000 all at once and
make an election to use annual gift tax exclusions for five years. Most
states also have qualified plans that provide current-year tax
The Hope and Lifetime Learning programs
provide tax credits of up to $1,500 and $2,000 respectively; however,
they are phased out for single filers whose income exceeds $41,000 and
joint filers whose income exceeds $83,000. The above-the-line student
loan interest deduction (up to $2,500) is phased out for single filers
whose income exceeds $50,000 and joint filers whose income exceeds
$100,000. Coverdell education savings accounts (up to $2,000) allow
taxpayers to put away after-tax dollars that grow tax-free; they are
phased out for single filers whose income exceeds $95,000 and joint
filers whose income exceeds $190,000. The above-the-line tuition and
fees deduction (up to $3,000) is phased out for single filers whose
income exceeds $65,000 and joint filers whose income exceeds $130,000.
may claim only one of the Hope credit, Lifetime Learning credit, or
tuition and fees deduction in any given year. Additionally, the Hope
credit is available only for the first two years of post-secondary
education; the Lifetime Learning credit and tuition and fees deduction
are available for an unlimited number of years.
from these plans are not taxable provided they are used for the
designated beneficiary's education expenses. Distributions taken from a
Coverdell education savings account to pay for education expenses do
not qualify as eligible expenses for the Hope credit, Lifetime Learning
credit, and tuition and fees deduction.
Saving for the future helps commercial real estate professionals
realize immediate tax reductions. Following are a few options; business
owners also should read the sidebar "The One-Person 401(k)" to learn
about another retirement plan.
Traditional IRA. Traditional
IRA contributions provide above-the-line deductions of up to the lesser
of $3,000 or 100 percent of earned income. Individuals more than 50
years old can make an additional catch-up contribution of $500.
to make traditional IRA contributions may be reduced or unallowable,
based on income level, for participants in employer-sponsored
retirement plans. For joint filers, eligibility is determined based on
the income level of the spouse enrolled in an employer-sponsored plan.
Keogh or Simplified Employee Pension.
Keogh or SEP plan contributions also qualify as above-the-line
deductions. Individuals with compensations of $160,000 can put away
$40,000 of tax-deferred dollars in each of these plans.
Roth IRA. Roth
IRA contributions are made with after-tax dollars, so they don't offer
any current tax savings. However, qualified Roth IRA contributions grow
tax-free. Individuals may contribute up to $3,000 or 100 percent of
earned income, less any other retirement account contributions.
Individuals more than 50 years old also may make a $500 catch-up
contribution. The same rules regarding traditional IRAs and
employer-sponsored retirement plans apply to Roth IRA contributions.
an individual's adjusted gross income is less than $100,000, he can
roll a traditional IRA into a Roth IRA. This type of withdrawal is
taxable in the year the rollover is made; however, it is not subject to
the 10 percent penalty normally associated with premature
distributions. These rolled-over funds can grow tax-free, and
withdrawals, once qualified, are nontaxable.
With a tax adviser's
guidance, commercial real estate business owners should start the
planning process now to help maximize their tax savings.