As registered representatives, most of you probably work out of an office where the company pays for the majority of your sales tools. But some of you have to pay for things out of your own pocket - like your phone or computer - and as such, you are entitled to deduct those expenses on your tax return at the end of the fiscal year. In fact, there are a host of deductions that brokers should be aware of, so read on and we'll show you how to make the most of your tax return.
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The Big Ones
Does the company pay for your sales assistant, or does his or her pay come out of your pocket? If it does come out of your pocket and the individual is employed legally -meaning you have made all of the necessary tax filings on the employee's behalf - then you are entitled to deduct his or her salary at year's end. (If you don't like this method of growing your business, check Alternatives To The Cold Call.)
This is a deduction that many brokers overlook. However, the lifeblood of your business - the prospecting phone lists you pay so dearly for - are deductible if you purchase them using your own money and you are not reimbursed by the firm.
A home office is deductible. This means that you can deduct the portion of your home used as a home office on your return. The problem, however, is that when you go to sell your property, there is a nasty little catch. It's called "recapture". This means that the dollar amount that you've deducted throughout the years by working from home is added back to the value of your house when you sell it. In other words, you could be hit with a larger-than-expected tax bill once you sell your home.
There is a way to avoid recapture, however. This can be done by not deducting your physical home-office space, but instead deducting the portion of the expenses allotted to your work. In other words, deduct a portion of the gas bill that corresponds to the size of the room, or rooms being used in your home to conduct business. You also can deduct the same proportion of your electric bill, as well as other utilities. (For more, check out How To Qualify For The Home-Office Tax Deduction.)
Other Deductible Items
If you have spent money on any of these items for business purposes and your company has not reimbursed you, they also are deductible:
- Internet - Do you use your internet connection at home to prospect, or even to print maps to clients' houses? If the computer is used solely to enhance your business, not only can you deduct the computer, but the monthly internet connection as well. Note: An internet connection at work can also be deducted if it is used for business purposes, and is not reimbursed by the firm.
- Telephone - Do you have a dedicated line for business in your home? Do you pay for a phone line at the office? If so, these expenses can be deducted.
- Cell phone - If you use your mobile phone to make client appointments, talk to clients, place trades, communicate with other members of your firm or to prospect, your cell phone use is deductible.
- Tolls/parking - Tolls and parking costs are deductible if they are incurred while traveling to see a client.
- Travel - If you spend money on airfare and/or hotels to attend educational seminars or industry conferences, your travel expenses may be deductible.
- Books/periodicals - Money spent purchasing books or periodicals that help you to hone your sales techniques or educate you about finer points of the business can all be deducted.
- Uniforms - Sorry, but if you wear a suit to work, it's not deductible. However, if you have to wear a uniform, say a golf shirt with a company logo on it, and the company does not reimburse you for the expense, it is considered a uniform and is deductible.
- Postage - Do you ever mail any sales literature to your clients on your own dime? If you do, consider this a deductible expense.
- Advertising - Do you advertise or send out fliers about your expertise and services using your own money? This can be deducted from your taxable income as well.
- Office supplies - Pens, paper, printers, fax machines, copiers, scanners, computers, monitors and software are all deductible on your return if you paid for the items yourself.
How it Works
Let's take a look at a practical example of how it all comes together. In this scenario, there are two brokers. Broker 1 doesn't itemize any expenses, and takes a standard deduction. Broker 2 itemizes his expenses. Both brokers are assumed to be single, in the same tax bracket and have similar financial situations. In other words, this is an apples-to-apples comparison to demonstrate the advantage of taking deductions. Note: We have used figures applicable to 2010 IRS tax laws and regulations.
Gross Income: $100,000
Less Standard Deduction: $5,700
Adjusted Gross Income/Assumed Taxable Income: $94,300
Tax Owed: $16,781.25 plus 28% of the amount over $82,400 = $20,113.25
Gross Income: $100,000
Less Itemized deductions:
-$3,000 Cold Caller
-$500 Prospecting Lists
-$100 Office Supplies
- $500 Cell Phone
-$2,500 Eligible Travel
-$4,500 Home office expenses (percentage of gas, electricity etc.)
Adjusted Gross Income/Assumed Taxable Income: $87,400
Total Tax Owed: $16,781.25 plus 28% of the amount over $82,400 =$18,181.25
In short, there are a host of items we spend big money on every day that are used in the course of business, but that we overlook come tax time. In the case above, Broker 2 saved around $2,000 in taxes!
As a general rule, it's a good idea to categorize your daily receipts and review any eligible deductions with an accountant (assuming your financial background has not focused on the world of tax law), preferably a Certified Public Accountant (CPA) before filing your return. As a professional, he or she should be able to give you even greater guidance in terms of what is and what is not permitted as a deduction. Again, a review with a tax professional is important, because each year tax laws change and certain expenses may or may not be deductible based on your individual circumstances.
If you are diligent and persistent when it comes to being organized, saving receipts and itemizing expenses on your tax return, you can be confident that you will save money. (Want to learn about other deductions? See Money-Saving Year-End Tax Tips.)
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