Tax Benefits of Using Commission Advances

It is common, especially in the real estate industry, for agents to receive advances on pending residential contracts even though the contract may not close for 15 to 90 days. If you receive an advance from a pending commission and you are a cash method taxpayer, you must include the advance amount in the tax year it is received.

If you repay the advance and fee for the advance in the same tax year in which you received them, you can subtract the total repayment (advance and fee) from the amount you include on your IRS tax return. This lowers your taxable AGI (adjusted gross income).

If you repay the advance and fee in the next tax year, you may use the total repayment (advance and fee) as a tax credit for that year. Again, lowering your AGI.

Regardless of which year the repayment is made, the benefit lies where once the repayment is used to reduce your taxable income, the fee paid for the service of advancing the commission results in a tax deduction. This is a major benefit for the self-employed.

If you have further questions regarding commission advances and their tax benefits, please consult your tax professional.