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List of 14 Items IRS Recognizes As Legitimate Expenses
You are not really optimizing your operating profit when you are not conducting tax planning efficiently. There’s little point when a lot of effort is put into maximizing revenue, but little effort in minimizing taxes.
You don’t need to run afoul with the law in order to pay as little taxes as possible. In fact, the IRS states very clearly how individuals and businesses can take advantage of tax rebates, waivers, loopholes, etc.
A lot of people don’t put enough effort into tax planning. Yet they are usually the ones dropping their jaws when they realize how a colleague paid half the amount of taxes compared to themselves.
If you are running a real estate business, make no mistake about it. Tax planning is something to be taken seriously.
You want to make your contribution towards nation building. At the same time, remind yourself that you are not doing charity.
One of the most basic ways to manage taxes is in the meticulous bookkeeping of expenses. It is astonishing how many property investors don’t realize how expenses can lessen the impact of liable taxes.
In case, you don’t understand how legitimately recorded expenses can lower taxes, here is a quick explanation.
The more your expenses pile up, the lower your net profit becomes. And lower profits translates to lower computed taxes. That should be easy enough to comprehend.
The challenge, or problem, is in identifying what expense items can be legitimately be accounted as operating expenses. As you might suspect, you don’t play with the IRS. You just follow their guidelines and do your duty.
Here are a list of general expense items that can be marked as ordinary operating expenses for a rental business. However, do note that tax guidelines can vary from place to place. So please check with the proper authorities if you are unsure.
1) Interest on mortgage, loans, and other credit facilities
When you take this into account, you don’t really pay a 5% interest on an equity loan at stated in the mortgage documents. You pay a little less.
2) Property tax and other taxes
This actually make a lot of logical sense. Nobody like being double taxed by the government.
3) Renewals of licenses
Sometimes you would get into a situation where you have to register your rental with local authorities. These are deductible fees.
4) Insurance premiums
Insurance agents like to list this down as a benefit when selling their policies as soon as they realize they are dealing with a real estate investor. It’s not limited homeowners insurance. If your car is for business use, you can possibly chuck that in as an expense as well. Do check with your accountant if unsure.
5) Association fees
If you own apartments and units in developments like condominiums, townhouses, timeshare, etc, you would most probably be involved with the associations and communities. The fees you pay that is often used towards repairs and maintenance is deductible.
If traveling is part and parcel of the job, than it can be an operating expense as well. This does not include your daily commute from home to the office. As a landlord, you’d probably be making frequent trips to and fro houses in the course of work.
You might be looking at properties overseas or just outside of town. These are legitimate operating activities of a real estate business. Most types of expenses including hotel accommodation and transportation are fully deductible. But certain items might only be partially deductible.
For example, meals can be a tricky item to account for. Check with your accountant when unsure.
Upkeeping activities include repairs, maintenance, housekeeping, issues that arose after your acquisition of the house, etc. However, do take note that improvements are not filed as upkeeping costs. In most (if not all) cases, this is under depreciation.
Many real estate players find depreciation as the holy grail of profits and cash flow. It is such a hugely significant item in the world of real estate that it cannot be just briefly mentioned here. So it’s left out in this list. But do keep it in your mind when meeting with your CPA.
9) Disability access
This is a special item because it is an improvement of a property and usually subject to depreciation. Yet it’s given a special status as a writable expense. It does pay to have a charitable heart.
10) Office supplies
Depending on how big your office is and how many staff you employ, the costs of office supplies can be a silent killer in your profit and loss statements. So don’t forget to let it loose on your tax planning. These include the costs of paper, stationary, postage, etc.
11) Market information
The subscriptions you have to Forbes, Newsweek, Fast Company, etc, are deductible. Don’t forget market intelligence and data services. You can even file seminars, workshops, and real estate bootcamps under this.
12) Marketing and advertising
You should be able to intuitively grasp these expenses as operating expenses. Don’t forget the budget you spent on online advertising.
13) Utility bills
Because of the nature of business in landlording, utilities are business expenses. However, this only applies if you are the one (instead of the tenant) paying for water. disposal, gas, electricity, etc.
Many will swear by how effective entertainment is in closing deals. This is partly recognized by the authorities… because only a portion of these costs are deductible.
As a closing note, please be reminded that you should never mess with the IRS. And that different accounting and tax standards apply in different places. Your local accountant is the best person to provide timely advice on tax matters.