Professional Report

PlainSpeakingFromALawyer

WHERE THE ILLINOIS BROKER LICENSE ACT COULD ACTUALLY HELP YOU REDUCE TAX LIABILITY

The Illinois Real Estate License Act of 2000, 225 ILCS 454/1 et. seq. contains a provision by which an Illinois licensee can assert some control over his or her licensed services and other income, and may allow for reduction of the licensee’s income tax liability. At Section 10-20(e), the Acts reads:

“Notwithstanding the fact that a sponsoring broker has an employment [or independent contractor] agreement with a licensee, a sponsoring broker may pay compensation directly to a corporation solely owned by that licensee that has been formed for the purpose of receiving compensation earned by the licensee…”

An Illinois licensee, then may form a corporation (or limited
liability company) where the licensee is the sole shareholder or
member, and income derived from licensed services or other
services may be paid by the sponsoring broker to that entity.
The Administrative Rules at 68 Part 1450, Section 1450.745
elaborates, requiring notice of the entity to IDFPR, but allow
all income earned by the sole shareholder (whether from
licensed services or elsewhere) to be paid to that entity. A few
saavy licensees have formed such entities, and here is why.

Certain business expenses (as explained below) can then be paid by the corporation “above the line” such as business related expenses for automobiles, cell phones, licensed or unlicensed assistants, professional organization dues and subscriptions, marketing expenses, computer and supplies, professional education, and license fees.

Where these expenses might otherwise be taken on the licensee’s individual tax return, either in Schedule A (Itemized Deductions) or Form 2106 (Employee Business Expenses), there are limitations imposed on the taxpayer which limit the benefit of those deductions. These limitations would not apply if taken by the corporation which the licensee formed to receive his or her income. If all of the business expenses were applied against the gross income received by the licensee, thereby reducing the net or taxable income (for federal and state income tax reporting), the licensee could actually reduce his or her tax liability.