Every year about this time, there are some generic lists of tax return mistakes that float around blogs and social media. They’re all the same because they’re often copied one from the other. And, they’re geared toward the average American taxpayer who has a job and prepares his own tax return.
Let’s shake things up.
Today I want to talk about the top 5 tax return mistakes I see. These are tax returns prepared by paid preparers (most of the time) for business owners and/or real estate investors.
#1: No home office deduction.
The home office deduction is NOT a red flag. Sometimes I feel like beating my head against my desk when I hear say it is. The law was clarified in 2004. That was 14 years ago! Since then, the home office deduction has become much easier to take. In fact, the IRS made it even easier to take the home office deduction FIVE YEARS ago in 2013. I’m not a huge fan of the simplified version, but I think it proves that the IRS was trying to make it easier, not harder for you to take the deduction.
And even if you’re still freaked out by it, even though it’s clearly very old news that the IRS considers it a red flag, just consider WHERE you take the deduction on an S Corp. It’s a rental deduction. The IRS doesn’t even know you have a home office. It could be a rental anywhere.
I’ll go back to banging my head on my desk now. Just take the deduction already! (Don’t forget you’ll need regular and exclusive use of the space.)
#2: No Depreciation Strategy.
Inevitably, CPAs who are not focused on real estate investor tax strategies use the same depreciation strategy. Always depreciate even if creates a suspended loss. (NO! Do not do this. It will cost you tax money in the end. You wind up trading 20% taxed money for 25% taxed money. Who does that?) A portion goes for land that is not depreciable and then the rest is depreciated for 27.5 years or 39 years.
Maybe that strategy works in rare cases, but if the depreciation creates a loss you can use against other income, why not have more depreciation? Or if there is income that is taxable, how about more depreciation against that income?
You can start depreciation. You can stop depreciation. You can catch up depreciation. You can accelerate depreciation.
If you have real estate investments, you need a depreciation strategy.
And before someone gives me a hard time about the OLD concern about having to recapture allowed or allowable depreciation, please just go read the 11-year-oldRev Proc 2007-16. (And even before that,Rev Proc 2002-9 and Rev Proc 2004-11 clarified that. That is 16 years ago and 14 years ago, respectively)
#3: Ignoring suspended losses.
Suspended losses are like having money sitting in a no interest checking account. Fine if it’s a few hundred (or thousand) dollars. But don’t put you don’t want your life savings there!
Every time I see suspended real estate losses, unused investment expenses and large carryforward capital gains, I just shake my head.
Stop the suspended real estate losses. That’s #1. And then figure out how to create real estate income to offset them or get your AGI under $100K so you can start using them up $25,000 at a crack. It’s just money sitting there…waiting for you to let it start working for you.
Investment expense. Well, if you’re a paper investor you may have already discovered that the Tax Cuts and Jobs Act is not your friend. If you haven’t discovered that yet, you will when you get your return prepared this next year. What are you doing with those expenses this year? Maybe it’s time for a strategy to figure out how you can legitimately turn those into business expenses that give you a deduction.
Carryover capital losses. Yourcapital loss deduction is limited to capital gains and then an additional $3K. The best strategy I know to get that money working for you is to find a way to create some capital gains so you can start using up those losses.
#4: Not taking REP status.
It seems like the real estate professional (REP) status is one or the other. Either people take the deduction when they shouldn’t (usually people who self-prepare) or people don’t take it when is is allowed (usually people whose CPAs are not experienced with real estate investors.)
I talked briefly about the REP status qualification earlier in this week in another blog, so I won’t repeat it.
If you qualify, take all the deductions you’re entitled perhaps except depreciation! I reviewed one return during a consultation recently and this little change would mean $4,000 less in taxes each year. How would you feel about leaving that much money on the table for the IRS?
#5: No strategy.
Missed pension deadlines.
Wrong pension types.
Wrong business structures.
Missed deductions due to no strategy.
And now, we have a brand new complicated Tax Act.
Can you really afford to keep operating like this? You need a strategy.
Contact Richard@USTaxAid.com or 888-592-4769 to see if we can work with you.