I’ve had clients who make 14 million dollars a year ask me this question and clients who made 14 thousand dollars ask me this question. Let me give you a phrase to remember. The phrase is simply “Ordinary and Necessary.” This is a phrase the IRS often uses during an audit. If a deduction was in the grey area they ask if it was ordinary and necessary. This phrase should be asked before every purchase for your business. If an expense is ordinary (meaning most people do it) and necessary (meaning you must have it to operate), then it is most likely a deduction. Theres a lot of armchair accountants that exist today. It is best to become educated and know how to track a deduction.
Let me give a few examples that happen during a normal day as a business owner.
I have a 12:30 lunch with Rob. Rob is a dear friend of mine but the intent of the lunch is to talk about a property that we are investing in. I have to drive to go meet Rob. I then pay for the meal with Rob. I then call Rob on my way back to the office to follow up. On my way back, I stop and get a water and beef jerky.
What was deductible during this event? Everything but the beef jerky and water.
- The lunch was. The lunch had a purpose that was intended for my business. There’s a few rules to documenting a business meal. You will need to notate the date, costs, place, business purpose, and who were with. The first three items are located on the front of the receipt. The purpose and who were with can be notated on the back. It is best to store and make a digital copy of the receipts as meals will always need documentation in case of an audit.
- My mileage to the meal was. This is what I see documented the least. Although tracking mileage is tedious, it still adds up. There are multiple ways to track mileage. Some clients use mileage logs and others use phone apps. Whatever you choose, please track your mileage for business use.
- A portion of my cell phone. We no longer live in a society where cell phones aren’t normal. Everyone has one, everyone needs one, and businesses use them.
The lists of deductions for Real Estate investors is extensive. Keep in mind that when flipping or renting a property, your largest expense could be your tax bill. With this being said, please document everything so you can know your true net profit. A true net profit is what you make post taxes not before. The best way to lower your taxes is to stay aware of your taxes. If you have any items that go in to a property, it will most likely be a deduction.
Below are some common bullet point items that are a deduction for RE Investors.
- Home Office – This is able to be taken as a deduction if you have 1) a dedicated home office space 2) a profit
- Commissions or Contracted Labor
- Repairs- This will all depend on the type of repair. Some repairs are taken over a period of time depending on the condition of the property.
- Property Management Fees
- Mortgage Interest
- Real Estate Taxes
- Phones, Internet
- Legal and Professional fees- Tax accountants
- Business Meals
At the end of the day an ounce of prevention is worth more than a pound of cure when it comes to taxes. When tracking information for taxes you are able to see your true net income. A true net income will help you in your investing to make educated decisions when it comes to financial forecasting.