Tax deductibility of a commission advance, how to use to your benefit.
With tax season fast approaching, we wanted to give you a few reminders about the tax benefits when receiving a commission advance. Suffice it to say, there’s good news, so take advantage.
What is tax deductible?
Fees: As an independent contractor, the fees you pay to secure a commission advance are a fully deductible business expense. It’s a true cost of doing business and as such will be 100% deductible. For sole proprietors, this means recording the fees as a business expense on Schedule C of your tax return.
Business expenses: Further benefits when receiving an advance is the fact that business expenses paid for with your advance proceeds are also tax deductible. For example, say you use a portion of your commission advance to pay for office rent. That rent payment is a tax deductible expense at the end of the year, even though you used your commission advance to make the payment. The same holds true for any other legitimate business expense, such as purchasing marketing materials, car expenses and client entertainment. Once again, these expenses should be recorded on Schedule C of your tax return if you run your real estate business as a sole proprietorship.
Personal versus business
As with any sole proprietorship, it’s important to keep your business expenses separate from your personal expenses for tax purposes. As an example, client lunches can be tax deductible whereas household food is not. Another example is the cost of operating your car. You can deduct as a legitimate business expense the mileage cost for shuttling your buyers to showings, but not for driving your family to grandma’s for Sunday dinner.
Tax issues are complex and it’s unlikely we’ve answered all of your questions in this short blog post. As such, it’s advisable to always consult a tax professional prior to filing your taxes.
Do you have a question about taxes, or any other aspect of a commission advance, that we could address in a future blog post? If so, please leave it in the comments section below.