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The recent tax bill has left businesses of all varieties a bit confused; and that’s especially true for real estate agents. Here’s your quick guide to what these new changes mean for your business.
What You Should Know
For decades, self-employed individuals paid higher taxes than people with W-2 salary jobs. That was generally because employers paid half of an employee’s social security tax on their behalf. With the recent passage of the Tax Cuts and Jobs Act, this will change for a number of self-employed taxpayers, both inside and outside the real estate industry. That said, there are some key exceptions that will prevent certain people from taking advantage.
How it Works
Since the new tax laws reduce the corporate tax rate from 35 percent to 21 percent, many congressional voters decided that it would be best to also provide tax deductions to independent contractors, sole proprietors and pass-through businesses, such as LLCs, partnerships and S corporations. This not only means lower marginal tax rates; it also means significant up-front deductions of 20 percent for any earned business income.
With that said, there are some conditions. For one, the new tax code will limit the 20-percent deduction to service businesses considered “non-personal.” This would exclude any business in which its primary asset is the skill or reputation of its owners or employees. Though many are calling this wording vague, most agree it will include any personal service businesses involving the performance of services in law, health, athletics, consulting, financial and brokerage.
At first glance, it would seem obvious that real estate agents and brokers would qualify as personal service businesses, and would therefore be ineligible for a 20-percent tax deduction. Fortunately, the National Association of REALTORS® was able to help secure a personal service income exception for many real estate professionals. In essence, this exemption means that the personal service restriction will not apply if the business owner’s taxable income falls below $315,000 for couples filing jointly or $157,500 for single taxpayers.
Unfortunately, if a real estate agent or broker earns more than this on a given year, he or she will not be able to benefit from the 20-percent deduction.
The Bottom Line
Although it was meant to simplify the tax code, the new bill has caused some confusion for independent contractors and pass-through business owners, who aren’t quite sure if they will qualify for substantial up-front deductions. For real estate agents and brokers, however, things are relatively straightforward: If your taxable income falls below $157,500 or $315,000, depending on your filing status, you will generally be able to claim the entire 20-percent deduction under the new personal service income exception.
For some real estate professionals, it may be more profitable to manage their earnings toward the end of the tax year to ensure that they do not exceed the base income threshold. While it’s generally best to maximize earning potential, there are scenarios that could render late-year earnings unprofitable, especially if you exceed the $157,500 or $315,000 cut-off by a few hundred or thousand dollars. If you are unsure how to qualify for the new deduction, talk to your accountant or a certified tax professional.
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