Top Ten Tax Mistakes Made by Real Estate Investors

Recently, I was sitting in a Maryland Real Estate Investors Association meeting in Baltimore, listening to a presentation by a very good fellow CPA and I noticed the audience at the meeting were rapt with what was being presented while at the same time wanting to learn more (one really can’t learn enough about how to legally save on taxes in only an hour).

As a CPA, I decided to write this article to explore some of the tax savings strategies that real estate investors don’t consider in their business. In short, I wanted to explore these questions I wanted to ask my fellow real estate investors:

1. Are you satisfied with the taxes you pay?
2. Are you confident you’re taking advantage of every available break?
3. Is your tax advisor giving you proactive advice for saving on your taxes?

I’ve got bad news and I’ve got good news. The bad news is, you’re right. You do pay too much tax. You’re probably not taking advantage of every tax break you can. And most advisors do a poor job of saving their clients’ money.

The good news is, you don’t have to feel that way. You just need a better plan.

This article will discuss ten of the biggest mistakes real estate investors make. Then we’ll explore how to solve them.

Mistake #1: Failing to Plan: Most of you has heard of the quote, “Most people don’t plan to fail; they fail to plan.” Sometimes a mistake at the beginning of a journey, is the most fatal one. The first mistake then is failing to plan. It really doesn’t matter how good your tax accountant is, if you show up in his office with the best receipts shoebox there is, there’s not much that can be done if you didn’t know you could write off your kid’s braces as a business expense (yes there is a legal way). Even Supreme Court Justice William Rehnquist weighed in on tax planning when he said, “There is nothing wrong with a strategy to avoid the payment of taxes. The Internal Revenue Code doesn’t prevent that.”

Why is tax planning important? Tax planning is about plotting a roadmap to the destination of minimized tax obligations. Good tax planning can inform you on what, when, and how you take action to minimize your taxes. And tax planning gives you two more powerful advantages.

First, it’s the key to your financial defenses. As a real estate investor, you have two ways to put cash in your pocket. Financial offense is making more. Financial defense is spending less. For most real estate investors taxes, can be our biggest expense and many of us are ill-equipped to deal with the consequences of not taking advantage of proactive tax planning. So, it makes sense to focus our financial defense where we spend the most. Sure, you can save 15% on car insurance by switching to GEICO. (Everybody knows that!) But how much will that really save in the long run? Isn’t it interesting how old adages still apply? Let see if you remember this one, “A dollar saved is a dollar earned”. The more you can save, the more you have available for making deals.

Second, tax planning guarantees results. You can spend all sorts of time, effort, and money promoting your business. But that can’t guarantee results. Or you can set up a medical expense reimbursement plan, deduct your daughter’s braces, and guarantee savings. Who doesn’t like guarantees?

Taxable Income: Before we go on to more of the mistakes, it’s important to understand how our taxes work. If we don’t have a fundamental understanding of this, then we won’t understand some of the specific strategies we’ll be exploring later.

Income: The process starts with income. And this includes most of what you’d think the IRS is interested in:

• Earned income from wages, salaries, bonuses, and commissions.
• Profits and losses from your own business.
• Interest and dividends from bank accounts, stocks, bonds, and mutual funds.
• Capital gains from property sales.
• Pensions, IRAs, and annuity income.
• Alimony and gambling winnings.
• Even illegal income is taxable. The IRS doesn’t care how you make it; they just want their share! (The good news is, if you’re operating an illegal business, you can deduct the same expenses as if you were running a legitimate business. If you’re a bookie, you can deduct the cost of the cell phone you use to take bets.

Adjustments to Income: Once you’ve added up total income, it’s time to start subtracting “adjustments to income.” These are a group of special deductions, listed on the first page of Form 1040, that you can take whether you itemize deductions or not. Total income minus adjustments to income equals “adjusted gross income” or “AGI.” Adjustments to income are also called “above the line” deductions, because you take them “above” AGI.

Adjustments include:

• IRA contributions
• moving expenses
• half of your self-employment tax
• self-employed health insurance
• self-employed retirement plan contributions
• alimony you pay
• student loan interest

Once you’ve determined adjusted gross income, you can take a standard deduction oritemized deductions, whichever is greater. The standard deduction for 2017 is $6,350 for single taxpayers, $9,350 for heads of households, $12,700 for joint filers, and $6,350 each for married couples filing separately.

Tax Deductions: Tax deductions reduce your taxable income. If you’re in the 25% bracket, an extra dollar of deductions cuts your tax by 25 cents. If you’re in the 35% bracket, that same extra dollar of deductions cuts your tax by 35 cents. If you are fortunate enough, you may be able to exceed the standard by itemizing your deductions.

As you can see below, there are many opportunities available to taxpayers. The rule obviously, is to take the higher of the two amounts. Finally, you can also deduct a personal exemption of $4,050 for yourself, your spouse, and any dependents.

Standard or Itemized Deductions?

Standard Deductions

• Single - $6,350
• HoH - $9,350
• Married/Joint - $12,700
• Married/ Separate - $6,350

Itemized Deductions

• Medical
• State/Local Taxes
• Foreign Taxes
• Interest
• Casualty/Theft Losses
• Charitable gifts
• Miscellaneous

Obviously the general rule is to take the higher amount of Standard Deductions or Itemized Deductions.

Once you’ve subtracted deductions and personal exemptions, you’ll have taxable income. At that point, the table of tax brackets tells you how much to pay:

2017 Tax Brackets

Rate Single Joint

• 10% ................................................................$..0 ........................................$0
• 15% ...........................................................$9,326 ...............................$18,651
• 25% ...........................................................$37,951 .............................$75,901
• 28% ...........................................................$91,901 ...........................$153,101
• 33% .........................................................$190,651 ...........................$233,351
• 35% .........................................................$416,701 ...........................$416,701
• 39.6% ......................................................$418,401 ...........................$470,701

Not included in the above tax brackets are other nuggets from the IRS such as Self Employment Tax for business owners that replaces Social Security and Medicare. Oh, and don’t forget that your itemized deductions and personal exemptions start phasing out once your income hits certain levels. For 2017, those are $261,500 for singles and $313,800 for joint filers.

The bottom line here is that “tax brackets” aren’t as simple as they might appear. Your actual tax rate can be quite a bit higher than your supposed “tax bracket.”

Tax Credits: The best deal in town are the tax credits. Why? You get to subtract any tax credits. These are dollar-for-dollar tax reductions, regardless of your tax bracket. So, if you’re in the 15% bracket, a dollar’s worth of tax credit cuts your tax by a full dollar. If you’re in the 35% bracket, an extra dollar’s worth of tax credit cuts your tax by the same dollar.

There’s no secret to tax credits, other than knowing what’s out there. Here are some to know about:

• Family Credits
• Education
• Foreign Tax
• General Business
• Renovation
• Energy

Now that we’ve taken the 74,608-page tax code and reduced them to about 3 pages of “easy to understand” explanation, we can begin exploring some of the other mistakes we as real estate investors make.

So, here’s the bottom line: You lose . . . every time you spend after-tax dollars . . . That could have been pre-tax dollars.

Let me repeat that. You lose . . . every time you spend after-tax dollars . . . That could have been pre-tax dollars.

Now here comes the fun stuff (yes taxes can be fun!!). The balance of this article will focus on how to turn after-tax dollars into pre-tax dollars. We’re going to use three primary strategies.

1. Earn as much nontaxable income as possible.
2. Make the most of adjustments to income, deductions, and credits. There’s really no magic to it, other than knowing what’s available.
3. Shift income to later tax years and lower-bracket taxpayers. This includes making the most of tax-deferred retirement plans and shifting income to lower-bracket children, grandchildren and other family members.

Mistake #2: “Audit Paranoia” or like I like to call the Unreasonable Fear of the IRS. The second big mistake is nearly as important as the first, and that’s fearing, rather than respecting the IRS. I’ve had clients argue with me not to take deductions they are legally able to because of a fear of an IRS audit.

What does the kind of tax planning we’re talking about do to your odds of being audited? The truth is, most experts say it pays to be aggressive. That’s because overall audit odds are so low, that most legitimate deductions aren’t likely to wave “red flags.”

"Worried about an IRS Audit? Avoid what's called a red flag. That's something the IRS always looks for. For example, say you have some money left in your bank account after paying taxes. That's a red flag!!" ---Jay Leno ---

With all due respect to our friend Jay Lento, audit rates are at historic lows. For 2014, the overall audit rate was just one in every 100 returns. The IRS primarily targets small businesses, especially sole proprietorships, and cash industries like pizza parlors and coin-operated laundromats with opportunities to hide income and skim profits. In fact, they publish a series of audit guides that you can download from their web site that tell you exactly what they’re looking for when they audit you!

Look at the chart below. You’ll see that the IRS audits just one-half of one percent of S corporations and partnerships. What does that tell you about the kind of entity you should be operating in?

2014 IRS Audit Rates

• Schedule C: $0 - $24,999 .................................................................... 1.0%
• Schedule C: $25,000 - $99,999 ........................................................... 1.9%
• Schedule C: $100,000+ ....................................................................... 2.1%
• Partnerships.......................................................................................... 0.5%
• S-Corporations .................................................................................... 0.5%

If you’ve kept up with recent budget discussions of the new Trump Administration, severe budget cuts are being considered for the IRS, further limiting the agency’s ability do perform audits, but most likely they will concentrate on the Schedule C as depicted above.

Mistake #3: Missed Depreciation Expense Deductions: When it comes to filing taxes on your rental properties, you’ll start with your total rental income. Then you’ll subtract your obvious operating expenses, like advertising, insurance, interest, maintenance and repairs, professional fees, and the like.

But then you get to take depreciation deductions. Depreciation is the process of writing off a capital asset, such as a rental property, over a period of time intended to approximate its useful life. For residential properties, this is 27.5 years; for nonresidential properties, it’s 39 years. Depreciation is especially valuable because it’s not an actual out-of-pocket-expense. But lots of investors miss valuable depreciation deductions because they don’t know how to make the most of them. The standards 27.5 years for residential real estate and the 39 years for commercial or non-residential is the easiest way to depreciate, however, with a little bit of effort, real estate investors can employ cost segregation studies to break out different components into a faster depreciation timelines to take advantage of the time value of money. This strategy is a powerful strategy that will allow investors to report a loss to the IRS, even if they generate a positive cash flow from their rental activities. What the IRS code allows is simply the breaking up of the different components of a property into 5, 7, 10, and 15-year asset designation for depreciation purposes. 5 year property is considered real property and includes such things as:

• Cabinets, Counter Tops
• Refrigerator/Dishwasher
• PA/Sound Systems
• Oven/Rage/Microwave, Stovetops
• Washer/Dryer
• Security Systems
• Supplemental Power Systems
• Telephones
• Walls/Partitions
• Window Treatments...and more!

Mistake #4: Repairs vs Improvements – One of the most important decisions you’ll make as you own your properties involves distinguishing between “repairs” and “improvements.” Repairs are deductible immediately as you make them. Improvements are depreciable over time. It usually makes sense to characterize fix-ups as repairs so you can deduct them faster.

The definitions seem straightforward enough. Repairs keep your property in good operating condition. They don’t add value, and they don’t prolong the property’s use. IRS examples include painting, plastering, repairing broken windows, and fixing gutters, floors, and leaks. Improvements adapt your property to new uses, add value, or prolong its use. IRS examples include room additions, upgraded appliances, new landscaping, and replacing components like furnaces, roofs, and windows.

But even the Internal Revenue Manual that tells IRS agents how to audit you admits that distinguishing repairs from improvements is a gray area. You’d think that replacing a roof is pretty clearly an improvement, right? Common sense tells you it adds value and prolongs the property’s life. But a recent tax court case ruled that an investor could deduct a roof as a repair because it just helped keep the property in good operating condition over the course of its existing expected life.

Repairs vs. Improvements

Repairs__________________________________________________Improvements

Deductible Now......................................................................Depreciable over time

Keep Property in good condition.............................................Adapt to new use

Don't add value........................................................................Add value to property

Don't prolong use.....................................................................Prolong Property Use

• Paint....................................................................................Room Addition
• Plaster..................................................................................Upgrade Appliances
• Repair broken windows.......................................................Landscaping
• Fix gutters, floors, leaks......................................................Replace Components

Mistake #5: Investors vs Dealers – Most investors buy property for long-term investment. Your total return includes current income from rents and long-term capital appreciation. But some investors don’t want to manage tenants or hold long-term. They’d rather buy, maybe rehab or renovate, and flip for quick gain. How does that affect your tax bill?

If you buy a property to hold and manage for long-term gain, it’s considered an investment. There’s no self-employment tax on rental income or gains. You can take depreciation deductions. When you sell, you can take advantage of lower rates for long-term capital gains. You can even use tax-free exchanges to defer tax on your sale.

But if you buy a property with the intent to resell it in the ordinary course of your trade or business, it’s not considered an investment. It’s considered a “dealer” property. It’s essentially treated like inventory, just as if you were selling groceries or car parts. You’ll owe self-employment tax on your earnings. You can’t take depreciation deductions. Your profit when you sell is treated as ordinary income. And you can’t use tax-free exchanges to defer tax on your sales. The table below summarizes the differences:

Investors vs. Dealers

Investors....................................................................................... Dealers

Buy as a long term investment............................................. Buy with intent to resell

Avoid Self-Employment Tax................................................. Pay Self-Employment Tax

Depreciation Deductions....................................................... No Depreciation Deductions

Capital Gains......................................................................... Ordinary Income

1031 Tax Free Exchange....................................................... No 1031 Tax Free Exchange

For most “dealer” properties, the biggest problem is self-employment tax. If you want to reduce that tax, you might consider operating that part of your business through an S-corporation.

If you deal in properties as a sole proprietor, or a single-member LLC taxed as a sole proprietorship, you’ll report your net income on Schedule C. You’ll pay tax at whatever your personal rate is. But you’ll also pay self-employment tax, of 15.3% on your first $118,500 of “net self-employment income” and 2.9% of anything above that. You’ll also owe a 0.9% surtax on earned income over $200,000 if you’re single, $250,000 if you’re married filing jointly, or $125,000 if you’re married filing separately.

To illustrate let's compare the taxes you will be as a sole proprietor vs as a shareholder of an S-Corporation. Let’s say your profit at the end of the year is $80,000. You’ll pay regular tax at your regular rate, whatever that is. You’ll also pay about $11,304 in self-employment tax as a sole-proprietor. What about if you run your business as an S-Corporation? One requirement is that you would have to pay yourself a reasonable salary. So let's say you take $40,000 as a salary and the resulting $40,000 as a distribution from the business. Your FICA under this scenario would be about $6,120 which is a reduction in $5,184!

The self-employment tax replaces the Social Security and Medicare tax that your employer would pay and withhold if you weren’t self-employed. How many of you plan to retire on Social Security?

Mistake #6: Missing Family Employment – Now let’s talk about the sixth mistake: missing family employment. Hiring your children and grandchildren can be a great way to cut taxes on your income by shifting it to someone who pays less.

• Yes, there’s a minimum age. They must be at least seven years old.
• Their first $6,300 of earned income is taxed at zero. That’s because it’s the standard deduction for a single taxpayer – even if you claim them as your dependent. Their next $9,275 is taxed at just 10%. So, you can shift a lot of income downstream.
• You must pay them a “reasonable” wage for the service they perform. The Tax Court says a “reasonable wage” is what you’d pay a commercial vendor for the same service, with an adjustment made for the child’s age and experience. So, if your 12-year-old son cuts grass for your rental properties, pay him what a landscaping service might charge. If your 15-year-old helps keep your books, pay him a bit less than a bookkeeping service might charge. Does anyone have a teenager who helps with your web site? What would you pay a commercial designer for that service? To audit-proof your return, write out a job description and keep a timesheet.
• Pay by check, so you can document the payment.
• You must deposit the check into an account in the child’s name. But it doesn’t have to be his pizza-and-Nintendo fund. It can be a Roth IRA for decades of tax-free growth. It can be a Section 529 college savings plan. Or it can be a custodial account that you control until they turn 21. Now, you can’t use money in a custodial account for your obligations of parental support. But private and parochial school aren’t obligations of parental support. Sleepaway summer camp isn’t an obligation of parental support.
• Let’s say your teenage daughter wants to spend two weeks at horse camp. You can earn the fee yourself, pay tax on it, and pay for camp with after-tax dollars. Or you can pay her to work in your business, deposit the check in her custodial account, and then, as custodian stroke the check to the camp. Hiring your daughter effectively lets you deduct her camp as a business expense.
• If you hire your child to work in an unincorporated business, you don’t have to withhold for Social Security until they turn 18. So, this really is tax-free money. You’ll have to issue them a W-2 at the end of the year. But this is painless compared to the tax you’ll waste if you don’t take advantage of this strategy.

Mistake #7: Missing Medical Benefits: Now let’s talk about health-care costs. Surveys used to show that taxes used to be small business owner's’ biggest concern. Now it’s rising health care costs.

If you pay for your own health insurance, you can deduct it as an adjustment to income on Page 1 of Form 1040. If you itemize deductions, you can deduct unreimbursed medical and dental expenses on Schedule A, if they total more than 10% of your adjusted gross income. But most of us don’t spend that much.

What if there were a way to write off medical bills as business expenses? There is, and it’s called a Medical Expense Reimbursement Plan, or Section 105 Plan.

The Section 105 plan is an “employee” benefit plan. That means somebody needs to qualify as an employee. The problem is, if you run your business as a sole proprietorship (which includes a single-member LLC), a partnership, or an S-corporation, you’re considered “self-employed,’ and you can’t get benefits from the plan. So, you should figure out another way to qualify:

• If you’re a sole proprietor (or a single-member LLC taxed as a proprietorship) and you’re married, you can hire your spouse.
• If you’re a partner in a partnership (or LLC taxed as a partnership), you can hire your spouse so long as they don’t own more than 5% of the business.
• If you’re a shareholder or member in an entity taxed as an S-corporation, you don’t qualify and your spouse doesn’t qualify. Your best bet in that situation is to segregate part of your income into a separate entity, such as a proprietorship or a C-corporation, and run the plan through that entity.
• Finally, if you run your business – or even just a part of your overall business – as an entity taxed as a C-corporation, you do qualify as an employee all by yourself.

By the way, you can also use the 105 plan for family members other than your spouse. Let’s say you’re a single mom working as a real estate agent. You can hire your teenage child and use the plan to pay for their eyeglasses, braces, or other medical costs. You can even hire a retired parent to help cover their medical costs.

The “Fine Print”: The plan must cover all eligible employees. You can’t just cover yourself or your family and exclude everyone else. However, there are several “safe harbors” you can use to limit coverage. Specifically, you can exclude:

• Employees under age 25
• Employees working less than 35 hours per week
• Employees working less than nine months per year, and
• Employees who have worked for you for less than three years.

There are a couple of other exclusions for larger employees – and the IRS doesn’t pay a whole lot of attention in this area. But the fact remains that you do have to cover all employees – so if you have nonfamily employees and can’t exclude them under one of these rules, the 105 plan may not be appropriate for you.

The Benefit: Now for the benefit! Once you qualify, the plan lets you reimburse your employee for all medical expenses they incur for themselves, their spouse, and their dependents.

Let’s say you’re a married sole proprietor and you hire your spouse. You can reimburse them for all medical expenses they incur for themselves, their spouse (which means you), and your dependents.

Now you’ve taken what would probably have been a nondeductible personal expense – and converted it into a business expense.

You’ve avoided that 10% floor on itemized deductions. And if you pay self-employment tax on your net income, you’ll even avoid paying self-employment tax on the money you deduct through the 105 plan. That’s another 15.3% or 2.9% or 3.8%, depending on your self-employment income.

The Paperwork: What exactly can you deduct? Well, pretty much everything you can think of!

This includes all the expenses you see listed here:

• Major medical insurance, long-term care coverage, Medicare Part B and D coverage, and Medigap insurance.
• Co-pays, deductibles, and prescriptions.
• Dental, vision, and chiropractic care.
• Big-ticket expenses like braces for your kids’ teeth, LASIK surgery for your eyes, fertility treatments, and special schools for learning-disabled children.
• You can even reimburse for over-the-counter medications, vitamins and herbal supplements, and medical supplies, so long as they’re prescribed by a physician.

The best part is, this is money you’d spend anyway, whether you get to deduct it or not. You’re just moving it from a nondeductible place on your return, to a deductible place.

More Paperwork: You’ll need a written plan document, which we can provide you.

You’ll need to make sure the benefits you pay are “reasonable compensation” for the work your employee does. If your teenager stuffs a few envelopes for you, the IRS will have a hard time believing a full set of braces is “reasonable compensation” for that little work.

You’ll need to verify the work your employee does to establish that the benefits you pay are reasonable compensation. This is a big hot button with the IRS and Tax Court.

Finally, you’ll need to establish a “paper trail” to verify payment. This means tracking expenses, of course. It also means reimbursing your employee out of the business or paying their expenses directly out of the business.

It’s not enough just to pay your family’s expenses out of personal funds, total them up, and deduct them at the end of the year. A couple of recent Tax Court cases have established that you really do need to establish a business link to those expenses.

There’s no need for an outside third-party administrator. However, IRS rules state that employees can’t “self-certify” their own expenses. There’s no special reporting required. You’ll report reimbursements as “employee benefits” on Schedule C or Schedule E, Form 1065, or Form 1120. You’ll save income tax and self-employment tax.

There’s no pre-funding required. You don’t have to open a special account, like with Health Savings Accounts or flex-spending plans. You don’t have to decide ahead of time how much to contribute. And there’s no “use it or lose it” rule. The plan is just an accounting device that lets you characterize your family medical bills as business expenses.

All Section 105 plan sponsors must file Form 720 to report and pay a “patient-centered outcomes research institute” fee of $2/per participant by 7/31 of the year following the plan year. Ordinarily, this form is filed quarterly; however, if that’s the only excise tax you owe, you can file annually.

Health Savings Account: If a medical expense reimbursement plan isn’t appropriate, consider the new Health Savings Accounts. These arrangements combine a high-deductible health plan with a tax-free savings account to cover unreimbursed costs.

To qualify, you’ll need a “high deductible health plan” with a deductible of at least $1,300 for single coverage or $2,600 for family coverage. Neither you nor your spouse can be covered by a “non-high deductible health plan” or Medicare. The plan can’t provide any benefit, other than certain preventive care benefits, until the deductible for that year is satisfied. You’re not eligible if you’re covered by a separate plan or rider offering prescription drug benefits before the minimum annual deductible is satisfied.

Once you’ve established your eligibility, you can open a deductible savings account. You can contribute up to $3,350 for singles or $6,650 for families. You can use it for most kinds of health insurance, including COBRA continuation and long-term care premiums. You can also use it for the same sort of expenses as a Section 105 plan.

The Health Savings Account isn’t as powerful as the Section 105 Plan. You’ve got specific dollar contribution limits, and there’s no self-employment tax advantage. But Health Savings Accounts can still cut your overall health-care costs by eliminating tax on the money you use to pay them.

#8. Missing Car and Truck Expenses: Now let’s talk about car and truck expenses. I don’t want to take too much time here, but I do want to point out the most common mistake clients make with these expenses.

Who really knows what’s authorized? As of this writing the IRS has published guidance that the business use deductible is 53.5 cents a mile. How many of us really keeps track of our mileage? Do SUVs get more of a deduction than sedans? How about a Prius, after all it does use much gas? What about a minivan? While there is a wide variety of vehicles on the road, business use mileage is treated the same regardless of vehicle. Do you think we all spend the same to operate our cars?

It might surprise you to see how much it really costs to operate your car. And it’s notexactly 54 cents per mile!

Every year, AAA publishes a vehicle operating cost survey. Costs vary according to how much you drive – but if you’re taking the standard deduction for a car that costs more than 53.5.0 cents/mile, you’re losing money every time you turn the key.

If you’re taking the standard deduction now, you can switch to the “actual expense” method if you own your car, but not if you lease. You can’t switch from actual expenses to the mileage allowance if you’ve taken accelerated depreciation.

AAA 2015 Driving Costs Survey

Vehicle ...............................................................................Cents/Mile

• Small Sedan........................................................................$0.449
• Medium Sedan....................................................................$0.581
• Large Sedan........................................................................$0.71
• 4WD SUV...........................................................................$0.708
• Minivan...............................................................................$0.625

I know nobody likes keeping track of mileage logs and such. However, it's financially worth the effort if one opts for the standard mileage deductions. To make this easy, I suggest to my clients that they use an app to track their mileage on their smart phone. I personally use MileIQ, but there are several others available. Like we used to say in the Air Force, "it's pilot proof". All you have to do is activate the app and drive.

#9 Missing Meals & Entertainment: Let’s finish up with some fun deductions for meals and entertainment. The basic rule is that you can deduct cost for meals with a bona fide business purpose. This means meals with prospective or current buyers, sellers, tenants, referral sources, and any other business colleagues. And let me ask you – when do you ever eat with someone who’s not in one of those categories? If you’re really working to grow your business, the answer might be “never.” Be as aggressive as you can with what you define as bona fide business discussion!

The general rule is, you can deduct 50% of your meals and entertainment, so long as it isn’t “lavish or extraordinary.” The IRS knows you must eat, so you can’t deduct it all. But they’ll meet you halfway.

How many of you entertain at home? Do you ever discuss business? Are you deducting those meals, too? There’s no requirement that you eat out. Don’t forget to deduct home entertainment expenses too!

You can deduct entertainment expenses if they take place directly before or after substantial, bona fide discussion directly related to the active conduct of your business. You can deduct the face value of tickets to sporting and theatrical events, food and beverages, parking, taxes, and tips.

You don’t need receipts for expenses under $75. But you do need to record the five pieces of information listed on the right side of the slide in your business diary or records. And you should do it as close to daily as possible. The IRS wants to know how much you paid for the meal, the date of the meal, the place where it takes place, the business purpose of your discussion, and your business relationship with your guest. Keeping the receipts and recording this information on it is all you need to do. You should copy or take a picture of the receipt as sometimes the receipts deteriorate over time and are made unreadable.

Mistake #10: Missing Tax Coaching - Now that you see how real estate professionals and investors miss out on tax breaks, let’s talk about the biggest mistake of all.

What mistake is that?  Not getting real proactive tax planning.  

If you are a Real Estate Investor, a critical member of your team should be a real estate investor friendly tax advisor that is forward looking and can analyze your situation and help you implement strategies that minimize your tax burden.  

If they are really good, they'll guarantee your tax savings and stay with you step by step to implement the strategies until you reap the benefits.  

If you are contemplating a tax plan advisor ask them if they produce a written report of your situation and the strategies you should consider implementing.  Ask them if they will help you implement them and if they guarantee your savings. 

At most REIA meetings I've been to, I've met fellow CPAs who understand the real estate investing business.  Thats a good place to start your search.