CPA Peter Baker, a principal of Business Planning Group in Washington, D.C., a firm that specializes in real estate agents and brokers, answers questions about 2018 taxes for real estate professionals and how they are effected by the new tax plan. (See Tip #1) (See Tip #2)
Tax Tip #3
Sales associates and brokers typically aren’t wage or salary earners, so they don’t get W-2 income and are required to pay estimated taxes quarterly. That means they’ve already paid three quarterly estimates for the 2018 tax year even though rules aren’t out on the new deduction, or on other changes in the tax law, for that matter.
What’s going to happen come April if their estimated payments are off?
Hopefully they’ve been talking to their professional tax adviser or accountant for the previous quarters. There are two ways to approach estimated tax payments given the new environment. The taxpayer can apply what’s known as the safe harbor approach. That’s where they pay estimated taxes based on their prior year’s tax liability. As long as they do that, even if they end up owing more tax come April 2019, they won’t be penalized or face interest charges for underpayments. They’ll just have to settle up the amount they owe. Of course, if their current sales volume is down from the previous year, that could be a painful way to do it, because they’ll be basing their payments on higher income than they actually earn. So, the alternative is to forecast taxable income based on what they’ve earned year-to-date, subtract business expenses, and look at their pipeline of likely sales to forecast their anticipated earnings for the remainder of the year. Then, they factor in the 20 percent deduction.
If they don’t take the safe harbor approach, are they liable for penalties and interest payments if they underpay their taxes?
Potentially, they would be. However, the IRS has a first-time penalty abatement process for taxpayers who, for the past three years, have paid and filed their taxes on time and haven’t incurred any penalties. So, if they have a good three-year history, they would be eligible for a one-time waiver of penalties and interest payments if they underpay their taxes.
When can we expect the final rules from the IRS?
Hopefully, before the end of the year. The IRS will also be revising forms to reflect the new qualified business income deduction. That should also be coming out before the end of the year.