Real estate agents typically handle a wide range of financial tasks, such as managing client funds, preparing and reviewing contracts, and tracking income and expenses. In order to effectively manage their finances, real estate agents need to have a basic understanding of accounting principles and practices. Real estate agents should also be familiar with the accounting software and tools that are commonly used in the industry, such as QuickBooks Online. Additionally, real estate agents may need to work with an accountant or financial advisor to ensure that they are complying with all relevant laws and regulations and to help them make informed financial decisions.
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Basic Accounting Principles Needed for Real Estate Agents
Real estate agents need to have a basic understanding of accounting principles in order to effectively manage their finances. Some of the key accounting principles that real estate agents should be familiar with include the following:
Revenue recognition can change based on your accounting method. For example, many realtors file their taxes using the cash basis method of accounting. For these agents, revenue is recognized when it is constructively received. In other words, income is usually recognized when a direct deposit hits your bank account or when you have a check in your hand. For realtors that file on the accrual basis of accounting, revenue is recognized when earned rather than when it is received. For example, if you close a sale and earn your commission, you should recognize your portion of the revenue when the sale is closed rather than when your brokerage pays you.
The principle states that expenses should be matched with the revenue they help to generate. This means that real estate agents should record expenses in the same period as the related income. This principle can change depending on the method of accounting that you use. For example, on the accrual basis method of accounting, many expenses will be recognized when they are incurred and before they are paid. On the cash method of accounting, most expenses are recognized when funds are paid out.
It is critical to understand the documentation that is required in order to take tax deductions as a real estate agent. Most agents assume that spending money on credit cards and with debit cards provides enough documentation to substantiate the expenses in case of an audit. However, the IRS is very strict on documentation requirements for travel and meal expenses. Because realtors do a lot of traveling, it is crucial to keep good records. These records include things like mileage logs, receipts for gas & meals, and keeping good calendars that show historical appointments.
Accounting Principles Specific to Real Estate Agents
There are a few accounting principles that are specific to the real estate industry and that real estate agents should be familiar with. These include:
Many realtors are organized as S-corporations for tax purposes. S-corporations can offer significant tax savings for real estate agents, but it’s critical to understand how they operate. For example, you must set a reasonable salary for the owner of the company. Not doing so can lead to IRS scrutiny and lost tax savings. The way you can deduct certain expenses also changes when you become an S-corporation, such has vehicle and home office expenses. Educating yourself on these concepts or working with a professional goes a long way for S-corporations.
Vehicle Expense Deductions
This is one of the most common questions we get for real estate agents. Should I deduct mileage expenses or actual expenses for my vehicle? If you are taxed as a sole proprietor, you can either take actual expenses (depreciation of the vehicle, gas, repairs, etc.) or mileage expenses. Each year, the IRS sets a mileage rate in cents per mile that business owners can deduct on their personal tax returns. Generally speaking, mileage is more beneficial in situations where owners purchase cheaper cars and drive them for more than 5 years. Actual expenses can be more beneficial for owners that switch cars every few years and purchase more expensive vehicles. When you’re an S-corporation, you can either take actual expenses or get reimbursed by your company for mileage expenses. If you are going to take actual expenses, it’s important that the vehicle is owned by your business.
Accounting Best Practices for Real Estate Agents
There are several best practices that real estate agents can follow to ensure that their accounting practices are effective and efficient. Some of these best practices include:
- Use accounting software: Real estate agents should use accounting software, such as QuickBooks Online, to manage their financial records. This will help them to keep their records organized and accurate and will make it easier to generate financial reports.
- Reconcile bank statements: Real estate agents should regularly reconcile their bank statements to ensure that the transactions recorded in their accounting software match the transactions recorded by their bank. This will help to identify and correct any errors in their financial records.
- Track income and expenses: Real estate agents should track all of their income and expenses in order to have a clear picture of the financial performance of their business. This will help them to identify areas where they can save money and will provide valuable information for tax planning.
- Understand tax laws: Real estate agents should familiarize themselves with the tax laws that apply to their business in order to maximize their tax savings. This may include working with a tax advisor or accountant to develop a tax strategy for their business.
- Review financial statements: Real estate agents should regularly review their financial statements, such as the profit and loss statement and the balance sheet, to monitor the performance of their business and identify any potential problems. This will help them to make informed decisions about their business and will allow them to take corrective action if necessary.
Note About Bookkeeping
Bookkeeping is an important aspect of managing the finances of a real estate business. Real estate agents need to keep accurate and detailed records of their income and expenses in order to track the performance of their business and make informed decisions. This may include tasks such as recording receipts, tracking income and expenses, reconciling bank statements, and preparing financial reports. Real estate agents may choose to handle their own bookkeeping or they may hire a bookkeeper or accountant to handle these tasks for them. In either case, it is important for real estate agents to have a good understanding of bookkeeping principles and practices in order to ensure the accuracy and reliability of their financial records.
- Quickbooks Online is our recommended software for real estate agents. It allows them to create transaction rules to quickly and automatically identify categories for transactions.
- Don’t overuse your business cards. Many business owners become obsessed with paying the smallest amount of tax possible, and they will run non-business expenses through their business cards. This can create major potential liabilities down the road, and also cause credit financing issues in your personal and business life.
- It’s best to work with an accountant to get Quickbooks Online setup. You can decide to work with them on a regular basis or take care of things yourself throughout the year. However, guidance at the beginning is crucial to start on the right track.
- Get an outside accounting firm to verify your figures each year prior to filing your tax return. You can work with an external accountant even if you’ve hired one internally. This will help ensure you have a system of checks and balances that will get you consistent financial data.
Casey Moss Tax Makes it Easy for Real Estate Agents
Understanding these principles and getting set up correctly are critical to your financial future. As your business grows, the importance of developing a partnership with a professional that can give you guidance throughout the year increases drastically. Let Casey Moss Tax guide you through bookkeeping and tax issues throughout the year to make sure you are compliant and saving as much money as possible. Book your free consultation today to see how we can help!