You asked, we answered: Carrying losses forward from educational expenses
“I took courses and passed the exam for my real estate license in 2018, but I did not earn any commissions as a real estate agent until 2019. Can I roll those expenses forward against my earnings in 2019 to reduce the taxes I have to pay?”
Professional education is not cheap and the answer to this question could mean paying a very different amount at tax time. There are two parts to your question, so we’ll break it down, answer each part separately, and then in conclusion we’ll bring both parts back together.
The first issue we’ll address is what educational expenses are tax deductible or ellipse for a tax credit. Then we will learn about how you can carry forward a loss (To “carry forward” is the tax-speak way of saying you will be rolling expenses forward from one year to the next.) Once we have a good answer to both questions, we can give you a complete answer to the original question about those real estate courses in 2018.
Part 1: What educational expenses can be deducted from my earnings to reduce the amount of tax I owe?
The first thing we need to ask is whether this training is for helping you in your current line of work or if you are learning a new trade or business. If you are trying to start a new career—for example, studying for and taking the exam for your real estate license—then these expenses would not be tax deductible. On the other hand, if you are already practicing as a real estate agent and you were to take courses to improve your skills, then those costs would be tax deductible.
While learning skills for a new line of work won’t qualify as a deduction against your 1099 income, if you took courses at a college or university, you may qualify for a tax credit known as the Lifetime Learning Credit. We will look at that next.
If you spent money on courses taken at a college or university, you may be eligible for a tax credit of up to $2,000 each year through the Lifetime Learning Credit (sometimes referred to as the “LLC”) There are restrictions on this credit that might make you ineligible. You can learn more about who can claim Lifetime Learning Credit and other restrictions on the IRS.gov website. The IRS also offers a convenient tool that will walk you through the process of determining if you can claim an educational tax credit. Your college or university would need to be on this list of eligible schools to qualify you for the Lifetime Learning Credit.
Part 2: How do I carry forward expenses from one tax year to the next?
A term like “loss carryforward” might sound like a boring concept that only accountants should know about, but it’s actually easier to understand than you might think. Carryforward is just a way to rollover some or all of your expenses from one year into another. If you have ever had a cellphone plan that let you roll extra minutes over from one month to the next, then you can think of rolling forward your costs the same way.
So why would you want to rollover—or carryforward—an expense from one year to another? The same reason that you wanted to roll minutes on your iPhone over from one month to the next: You didn’t need them in June, so you took them into July to use. It’s similar for taxes. We’ll use an example to illustrate.
Let’s say near the end of 2018, you decide to be an Airbnb host. You’re going to spend money to get your house ready to rent. This money that you spent to get going are your startup costs. In this example, you took a few weeks before Thanksgiving and spent $2,000 on new beds, dishes, and linens to make sure your future guests have a comfortable place to stay. Your listing goes live on the Airbnb app in early December and you make $1,200 by New Years. When you do your taxes, your expenses ($2,000) are higher than your income ($1,200) so your business lost money for 2018 ($800). This isn’t the end of the world. It’s not uncommon to lose a little money in the first year.
Your loss of $800 will be reported in 2018 but you will get to carry this loss forward into 2019 to potentially help reduce the amount of tax you will have to pay that year. There are limitations to this deduction at higher income brackets (over $150,000) which we recommend discussing with a tax professional if you fall into that category.
In conclusion, returning to the original question: I took courses and passed the exam for my real estate license in 2018, but I did not earn any commissions as a real estate agent until 2019. Can I roll those expenses forward against my earnings in 2019 to reduce the taxes I have to pay?
You would be able to roll your startup costs from 2018 forward into 2019 to offset your 2019 income and lower the amount you have to pay in taxes using a loss carryforward strategy. There are limits and it would be best to speak to qualified tax professional for the best possible advice for your unique situation.
While you can carry forward startup costs, the amount you spent to get training as a future real estate agent would not count as startup costs that would be tax deductible in 2018 or in the future.
Once you are established, your ongoing training costs will be tax-deductible expenses that can offset your income and lower your tax bill for the year.
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Note: at Keeper, we care about helping you save on taxes. That leads us to generalize tax advice which ultimately cannot be completely generalized. Everyone's situation is different. Please drop a note above or reach out via email if you have questions.