Now that the New Year and Christmas season is well into the rearview mirror, it is time to start preparing for the next holiday—tax season, which has officially arrived.
This year, as the world continues to return to normal, the Internal Revenue Service (IRS) started tax season on Monday, Jan. 24, and set an April 18 tax filing deadline for most (April 15 is Emancipation Day, a holiday in Washington D.C.). Those requesting an extension will have until Monday, Oct. 17 to file.
To help advisors and agency owners prepare themselves, TMR spoke with Angie Rice, co-founder of Boutique Travel Advisors, a luxury travel company headquartered in Paradise Valley, Ariz.
Rice, a former CPA, walked TMR through what advisors need to know about 2021 taxes. Here’s just some of what advisors need to consider:
Disclaimer: Below is the opinion of TMR and Rice, it should not be considered to be, providing tax advice or tax counsel.
You may be overlooking some deductions
There are a number of things that you may be overlooking when going through your 2021 business expenses. If your vehicle is used to meet clients, this business use is a deductible expense. You can claim your actual vehicle expenses (depreciation or lease payments, gas, and oil, tires, repairs, and insurance) based on the percentage usage or apply the standard mileage deduction rate (56 cents per mile for 2021, which will increase to 58.50 cents for 2022).
Marketing and advertising expense are deductible “if incurred to maintain and grow your business,” Rice said. Make sure, however, that those expenses are “ordinary and accepted based on industry standards.” Things like print advertisements or social media marketing would be accepted.
Small gifts to clients are also deductible and not “uncommon” for advisors to provide to increase the probability of repeat clients and referrals. The IRS allows for a reduction of $25 per person per tax year for direct and indirect gift-giving, a limit that does not include shipping, engraving, and packaging. There is a way to boost that deduction.
“One way to increase the deductible nature of a ‘client gift’ is to incorporate branded merchandise costing $4.00 or less. The IRS considers such promotional items as an advertising expense. Giving promotional items allows you to enhance the client experience and build your brand while also lowering your tax liability,” she said.
FAM Trips could be eligible for deductions, too.
Most advisors can likely prove that educational FAM trips, ones that provide the knowledge you need to be able to properly sell and inform clients, directly impact their sales.
"We cannot possibly say we are experts without having firsthand knowledge of the destinations we sell to our clients,” Rice said. “The industry is constantly evolving and is highly competitive; therefore, what's trendy today may not be what we recommend in the future. The more discerning your clients are, the more your company might have to invest in travel.”
The key is to choose FAM trips where your clients will travel. Before your trip, reach out to hotels and arrange for site inspections; at the same time, it can also be beneficial to mystery shop a hotel so that you can experience it from the eyes of a client. You will also want to incorporate day-to-day activities into your agenda that increase your knowledge of a given destination and what it has to offer to different types of travelers.
Also, Rice added, “be careful to allocate only your portion of a FAM trip when traveling with others. In other words, only deduct the portion of the cost that would have been incurred if you had chosen to travel alone. While you may not be able to expense their costs unless they are working in your business, I think traveling as a family or with your significant other provides a more realistic perspective of the client experience. For this reason, I don't discourage combining a work trip with family.”
You may not get a deduction for a home office
The home office deduction is available to travel advisors that qualify as self-employed and those working as ICs as long as the taxpayer used a portion of the home exclusively for conducting business and the home is the taxpayer's principal place of business.
“There is more than one approach to applying the home office deduction, so be sure you evaluate the different options with your tax professional,” Rice said.
However, employed travel advisors are not eligible for the home office deduction, as the Tax Cuts and Jobs Act suspended the home office deduction from 2018 through 2025 for employees.
There are some changes for 2021
The Consolidated Appropriations Act was passed by Congress at the end of December 2020 and signed into law shortly after.
According to Rice, agencies and ICs can take a full deduction of business expenses related to meals in 2021, compared to the 50% deduction typically allowed by the IRS. Meals fall into that “business meal” category if they were had while traveling for business or while entertaining clients.
Agencies and advisors who used the ERTC also have deductions to make. Employers that qualified for the ERTC could claim a credit equal to 70% of qualifying wages, up to $10,000 per employee for each of the first three quarters of 2021.
The other major program is the Paycheck Protection Program—according to Rice, PPP funds in 2021 are not taxable on a federal level if forgiven, however, state laws may vary as to the treatment of PPP funds. It is also important to remember that if you received a PPP loan and are eligible for ERTC, you can't claim the same wages for both.
The dread you may feel during tax season may only be exacerbated by a lack of care during the previous 12 months of the year. It’s crucial to practice good record keeping throughout the year and reconcile your accounting regularly, not just for taxes but also for performance.
“If you fail to manage the finances of your business on a routine basis, you will lose sight of your performance. If you fail to analyze your spending, you are less likely to implement cost-saving measures. If you do not identify trends and changes in your sales and corresponding commissions, you will not be as prepared for the future,” Rice said.
How often you reconcile accounting depends on the volume of business you’re doing and your cash flow, but waiting until tax season to do so could cause missing commission payments to slip through the crack
“Expenses should be evaluated monthly or quarterly, depending on your business volume and cash position. Agencies with cash reserves probably do not have to fully reconcile their expenditures as often as an agency with low cash levels in their company's bank account,” Rice said. However, tracking and reconciling commissions should be monitored closely and more frequently.
“If you are self-employed or an independent contractor, you should have separate bank accounts and credit cards for business purposes.”
Find the right information and the right people to talk to
If all this is too much, and legitimate information from the IRS still overwhelms you, find a qualified tax professional to help. The value of a professional almost always outweighs the cost even for someone with a savvy business background.
“I would reach out to your State Society of CPAs for a directory of CPA firms in your area. I would also check with your Chambers of Commerce, the Better Business Bureau, and ask another small business owner in professional services to refer their tax accountant. Being in the professional service industry, travel agencies and travel advisors know the importance of referrals, so let's support other small businesses by promoting referrals from others,” Rice said.
Advisors can also head to nonprofit and for-profit organizations that provide business support to small business owners including the small business consulting firm that Rice co-founded, Centered CEOs.