Realtor Tax Planning – Salespersons and the Tax Cuts and Jobs Act
By Alliance Bay Realty
- TAX PLANNING – SALESPERSONS AND THE TAX CUTS AND JOBS ACT
- TWO WEBINARS - THE TAX CUTS AND JOBS ACT: WHAT IT MEANS FOR REAL ESTATE PROFESSIONALS
- POOL SAFETY REQUIREMENTS
Tax Planning – Salespersons and the Tax Cuts and Jobs Act
The Tax Cuts and Jobs Act (Act) allows for an above the line deduction of up to 20% of qualified business income for certain “pass-through” entities and independent contractors. As a result, REALTORS® have been asking four questions:
- Can a broker or salesperson conduct business as a limited liability company (LLC)? No. (Corporations Code Section 17701.04)
- Can a broker or salesperson conduct business as a corporation? Broker, yes. (Business and Professions Code Section 10131) Salesperson, no. (Business and Professions Code Section 10132)
- Can a broker pay a commission to a real estate salesperson’s corporation or LLC? Yes, if certain conditions have been met (see below).
- Does a salesperson need to create a pass-through entity to take advantage of the Act? Probably not.
In the Spring 2000 DRE Bulletin, the Commissioner stated “Business and Professions Code Section 10132 defines a real estate salesperson as ‘… a natural person who, for a compensation or in expectation of a compensation, is employed by a licensed real estate broker…’ Thus, DRE cannot and does not issue a salesperson license to a corporation.” AND “A careful analysis of Section 10137 has led the DRE to conclude that it would not be a violation of this Section if after a commission has been earned, the employing broker submits written instructions to the escrow directing it to pay the salesperson’s share of the commission to the salesperson’s corporation. Such instructions must be sent each time the salesperson earns a commission. Thus, a real estate broker can pay a commission, once earned by his or her salesperson, to the salesperson’s corporation in accordance with the broker’s instructions.” (emphasis added).
The Spring 2012 DRE Bulletin also makes it clear that once the salesperson has earned the commission, pursuant to the salesperson’s request, the broker could pay that commission to a third- party entity, so long as that entity did not engage in any real estate activities. So, once the salesperson has earned the commission, the salesperson could ask the broker to pay his or her commission to the salesperson’s corporation, or LLC, or grandmother, or the Red Cross for that matter so long as the entity, or grandmother, or the Red Cross did not engage in any real estate activities.
Finally, salespersons, as natural persons, and as independent contractors, may be eligible for the Act’s 20% deduction from qualified business income without having to form any other entity or take any other action. The deduction is available for taxable income up to $157,500 for single filers and $315,000 for joint filers, after which there is a phase out over a range of $50,000 (or $100,000 for joint filers). The deduction phases out completely at $207,500 for single filers and $415,00 for joint filers.
Salespersons, broker associates, and brokers are strongly advised to seek well-informed tax counsel before undertaking the expense of forming and maintaining a corporation in hopes of maximizing the tax advantages of the Act. Not all tax advisers understand the complexities of the real estate licensing laws, believing, incorrectly, that paying a salesperson’s corporation or LLC is the answer to lower taxes. While the IRS may never get around to auditing the salesperson who claims that their corporation or LLC earned the commissions, if they do, there could be a significant downside.
For more information on the Act, please refer to the following C.A.R. Legal resources: Tax Reform Law Chart: Prior Law vs. New, The Tax Cuts and Jobs Act – In Brief, and The Tax Cuts and Jobs Act – Highlights and In Depth