Category: General Information

General information for small business owners and individuals.

BUSINESS CREDIT, Business Strategies, Family Tax Issues, General Information, RUNNING YOUR BUSINESS, Self Employed, signing agent, TAX DEBT RELIEF, tax deductions, Tax Reduction, TAXES

Don’t Leave Money on the Table! 3 Year-End Tax Moves That Pay You—Not the IRS.

Howard Tax Prep LLC

The goal of this article is simple—to help you put more money back in your pocket. While the IRS probably won’t mail you a check (though that can happen in some instances), the real benefit comes from paying less in taxes. In other words, this article is all about smart tax strategy. I’m breaking down three powerful business deduction moves you can easily understand and put into action before the end of 2025 to reduce your taxable income and keep more of what you earn.

1.) Prepay Eligible Expenses (The 12-Month Rule)

The tax code IRS regulations contain a safe-harbor rule that allows cash-basis taxpayers to prepay and deduct qualifying expenses up to 12 months in advance without challenge, adjustment, or change by the IRS. Under this little-known rule commonly referred to as the 12-Month Rule, cash-basis taxpayers can often deduct certain expenses in the current tax year, even if the service extends into the following year, provided the benefit doesn’t extend beyond the end of the next tax year.

Common prepaid items include:

  • Business Insurance Premiums: Paying the full 12-month premium in December 2025 instead of January 2026 allows you to deduct the expense this year.
  • Rent: Prepaying the first month of 2026 rent in December 2025.
  • Software Licenses/Subscriptions: Prepaying annual fees in December.

Example: Shifting a Lease Deduction

Imagine you pay $\$3,000$ in lease payments each month, and you would like to secure a $\$36,000$ deduction for tax year 2025.

  • On Wednesday, December 31, 2025, you mail your landlord a rent check for $\$36,000$ to cover the entire 2026 lease.
  • Your landlord does not receive the payment in the mail until Friday, January 2, 2026.

Here’s what happens:

  • Your Deduction (2025): You deduct the full $\$36,000$ this year (2025—the year you paid the money).
  • Landlord’s Income (2026): The landlord reports the $\$36,000$ as rental income in 2026 (the year they received the money).

Actionable Tip: Look at any annual or multi-month expenses coming due in early 2026. If the service covers only 12 months, prepay it in December 2025 to shift the deduction forward.

2. Stop Billing Customers, Clients, and Patients

Here is a rock-solid, time-tested, and easy strategy to reduce your taxable income for this year: simply stop billing your customers, clients, and patients until after December 31, 2025. Please note, this strategy assumes your business is on the cash basis of accounting and operates on the calendar year.

As a business owner, it may come as no surprise to you that most customers, clients, patients, and insurance companies don’t pay until they are billed. By delaying your invoicing until the end of the year, you effectively delay cash receipt. Since a cash-basis business only recognizes income when the cash is received (not when the service is performed), delaying the receipt pushes that income into the next tax year. This is one of the easiest ways for small business owners to postpone paying taxes on current year income.

Example: The Contractors Delayed Billing

Jake, a general contractor, usually invoices his customers at the end of each week.

  • This year, however, he sends no bills for services performed throughout December 2025.
  • Instead, he gathers up all those bills and mails them the first week of January 2026.

The Result: The payments for his December 2025 work will not be received until January or February 2026. He just postponed paying taxes on all his December income by successfully moving that income from 2025 to 2026.

Actionable Tip: Pause all non-essential billing runs starting around December 15th. Instruct your billing department or staff to hold all new invoices and statements until January 1, 2026.

3. Use Your Credit Cards Correctly

The rule for taking a tax deduction depends entirely on who owns the credit card being used for the purchase.

  • If you are a single-member LLC or sole proprietor filing Schedule C for your business, the day you charge a purchase to your business or personal credit card is the day you deduct the expense. Therefore, as a Schedule C taxpayer, you should consider using your credit cards for last-minute purchases of office supplies and other business necessities.
  • If you operate your business as a corporation (S-Corp or C-Corp) and the corporation has a credit card in its name, the same rule applies: the date of charge is the date of deduction for the corporation.
  • However, if you operate your business as a corporation and you are the personal owner of the credit card, the corporation must reimburse you if you want the corporation to realize the tax deduction, and that deduction happens on the date of reimbursement—not the date of the charge.

Example: The Consultant’s Last-Minute Purchase

A consultant, Maria, needs to buy $1,500 worth of new software on December 30th to get a deduction for the current year (2025).

  1. If Maria is a Sole Proprietor: She uses her personal credit card on December 30th. Deduction Date: December 30, 2025.
  2. If Maria runs an S-Corp: She uses her personal credit card on December 30th. She submits the expense report on January 2nd, and the corporation reimburses her on January 5th. Deduction Date: January 5, 2026.

Actionable Tip: If your corporation owes you money for business expenses charged to your personal card, submit your expense report and have your corporation make its reimbursements to you before midnight on December 31.

General Information

Hiring Summer Help? Here’s How It Could Earn Your Business Valuable Tax Credits.

Howard Tax Prep LLC

As summer approaches, many small businesses look for seasonal employees to help manage increased workloads or to fill in for staff on vacation. Whether you’re hiring teens for temporary help, college students returning home, or individuals looking for part-time employment, you could be eligible for thousands of dollars in federal tax credits—thanks to the Work Opportunity Tax Credit (WOTC).

The WOTC is a powerful but often overlooked tax incentive that rewards employers for hiring individuals from specific target groups that have historically faced employment barriers. For 2025, these credits can be especially helpful to businesses trying to stretch every dollar while also giving someone a chance to work.

Let’s take a deeper look at how this works—and how your business can benefit this summer.

What Is the Work Opportunity Tax Credit (WOTC)?

The Work Opportunity Tax Credit is a federal income tax credit available to employers who hire individuals from specific groups that have faced barriers to employment. The credit amount can range from $1,200 to over $9,600 per qualifying employee, depending on the target group and number of hours worked.

For small businesses hiring summer help, three of the most common WOTC categories are:

  • Designated Community Residents (DCR)
  • Qualified Summer Youth Employees
  • Qualified Supplemental Nutrition Assistance Program (SNAP) Recipients

1. Designated Community Resident (DCR)

A Designated Community Resident is an individual who is:

  • Between the ages of 18 and 39, and
  • Lives in a federally designated Empowerment Zone, Enterprise Community, or Renewal Community.

These zones are specific geographic areas with high unemployment and low income, and are identified by the IRS.

Example:
You hire Marcus, a 28-year-old who lives in a South Side Chicago neighborhood that qualifies as an Empowerment Zone. He works part-time for your landscaping company during the summer. Because Marcus meets the age and residency requirements, you could receive up to $2,400 in tax credits if he works at least 400 hours.

Pro Tip: You can use the Empowerment Zone locator tool on the IRS website or consult your tax professional to verify a candidate’s address.

2. Qualified Summer Youth Employee

This category applies specifically to:

  • Youth aged 16 to 17, and
  • Employed between May 1 and September 15, and
  • Living in a federally designated Empowerment Zone.

This category is ideal for small businesses that want to give local teens a chance to earn money and gain job experience.

Example:
You hire Jasmine, a 17-year-old high school student, to help with customer service in your ice cream shop from June through August. She lives in an Empowerment Zone. If she works at least 300 hours, you may qualify for a $1,200 tax credit just for hiring her.

This is a great way to invest in your community while also receiving a tax break.

3. Qualified SNAP Recipient

If your new hire is between 18–39 years old and has received Supplemental Nutrition Assistance Program (SNAP) benefits (also known as food stamps) for at least 6 months prior to being hired, you may be eligible for this category.

Example:
You bring on Daniel, a 34-year-old warehouse worker who is trying to re-enter the workforce. He’s been receiving SNAP benefits for the past year. If Daniel works at least 400 hours, you could claim up to $2,400 under the WOTC program.

What’s Required?

To claim the WOTC, employers must:

  1. Pre-screen the new hire using IRS Form 8850 before or on the date of the job offer.
  2. Submit Form 8850 and ETA Form 9061 to their state workforce agency within 28 days of the employee’s start date.
  3. Keep detailed records of hours worked and wages paid, as these will be used to calculate the credit.

You’ll claim the credit using IRS Form 5884 when you file your business taxes.

Why It Matters for Small Businesses

Hiring is already a significant investment of time and money. The WOTC allows small businesses to recoup part of those costs by offering a dollar-for-dollar reduction in taxes owed. Not only does it lighten your tax load, but it also promotes inclusive hiring practices and community development.

Plus, many of these employees bring fresh energy and perspective—something every growing business can benefit from during the busy summer months.

Final Thoughts: Don’t Leave Money on the Table

If you’re hiring summer workers, make sure to explore WOTC eligibility. It’s a smart financial move that not only rewards your business but helps those in your community get back on their feet.

Need help screening candidates or filing the necessary forms? We’re here to help. At Howard Tax Prep LLC, we work with small businesses every day to help them unlock tax savings and stay IRS-compliant.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, or business compliance assistance please contact us online, or call our office at 855-743-5765. Do you owe the IRS, or your state back taxes? Do you have unfiled tax returns? Is the IRS threatening to garnish your paycheck, or levy your bank account? Are you ready to get back on track with the IRS? Howard Tax Prep LLC will help you get back on track with the IRS, get into a settlement, or setup a payment with the IRS. Reach out to us now! Make sure tojoin our newsletter for more tips on reducing taxes, and increasing your wealth.

Author information: Trudy M. Howard is a managing member of Howard Tax Prep LLC, a south loop of Chicago tax preparation and accounting office.

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General Information

Tax Consequences of a Short Sale of Your Principal Residence.

Howard Tax Prep LLC

Here in our Chicago South Loop Tax Preparation office, we are meeting more taxpayers who are struggling to meet their financial obligations. Reasons for taxpayers’ lack of funds range from being laid off from work to increased property tax bills, in some cases with increases of up to 200%. Of course, with reduced incomes, some homeowners are unable to pay their mortgages on time, if at all. Read on to see the tax consequences of choosing the alternative option to foreclosure.

Many homeowners don’t want to go through the stress and embarrassment of a foreclosure, and most don’t want to damage their credit rating any further than necessary. While a short sale will still impact the homeowner’s credit rating, it will not have as significant an impact on the credit rating as a foreclosure would. Fortunately, there is an alternative for homeowners having trouble making their mortgage payments: a short sale.

Short sales avoid foreclosure, but they can result in tax liabilities. In a short sale, homeowners sell their home in a regular sale through a real estate agent for less than the amount of their mortgage. The lender accepts the sale proceeds, releases the mortgage lien on the property, and typically writes off the remainder of the loan as an uncollectible debt.

Lenders agree to short sales only where it’s clear that

  • the home is worth less than what the homeowner owes, and
  • the homeowner is financially unable to keep up the mortgage payments due to job loss, health issues, death, or other hardship circumstances.

Typically, a short sale involves forgiveness of part of the mortgage debt owed by the homeowner. Debt forgiveness can constitute taxable income to the borrower. Whether the debt forgiven in a short sale is taxable income depends on several factors, including whether

  • the mortgage is a recourse or a non-recourse loan,
  • the forgiven debt qualifies for the qualified principal residence indebtedness exclusion, or
  • the homeowner was insolvent at the time of the debt cancellation.

Forgiveness of a non-recourse loan (a loan for which the borrower is not personally liable) does not result in taxable income to the borrower. Twelve states allow only non-recourse home loans, but recourse loans (click here to read about recourse loans) are standard practice in the other 38 states.

Fortunately, for underwater homeowners who have recourse loans, Congress passed the Mortgage Forgiveness Debt Relief Act in 2007. Thanks to this law, up to $750,000 of “qualified principal residence indebtedness” forgiven by a lender is excluded from tax. This exclusion remains in effect through 2025 and applies only to debt to acquire or build the taxpayer’s principal residence.

Example. Susan Taxpayer’s primary residence has a $750,000 recourse mortgage loan, for which she is personally liable. Since she purchased the home, its value has declined to between $600,000 and $650,000.

Susan lost her job and can’t find another job with a salary large enough to pay her mortgage. Presented with these facts, Susan’s lender agrees to allow a short sale of the property for $635,000 and cancels the remaining $115,000 of mortgage debt. The $115,000 is qualified principal residence indebtedness that Susan may exclude from income tax.

Homeowners who don’t qualify for the qualified principal residence indebtedness exclusion can still avoid paying tax on their canceled indebtedness if they were insolvent when the debt was canceled. Taxpayers are insolvent if their total liabilities exceed the fair market value of all their assets immediately before the cancellation of the debt. It’s likely that most homeowners who can get their lenders to agree to a short sale qualify as insolvent.

Example. Tina Taxpayer’s main home has a $3,000,000 recourse mortgage loan. The home has declined in value to between $2,000,000 and $2,250,000.

Tina’s lender agrees to a short sale for $2,150,000 and cancels the remaining $850,000 of mortgage debt. Tina does not qualify for the exclusion for qualified principal residence indebtedness because more than $750,000 of debt was discharged, but she may still exclude the $850,000 from her income if she was insolvent when her lender canceled the debt.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, or business compliance assistance please contact us online, or call our office at 855-743-5765. Do you owe the IRS, or your state back taxes? Do you have unfiled tax returns? Is the IRS threatening to garnish your paycheck, or levy your bank account? Are you ready to get back on track with the IRS? Howard Tax Prep LLC will help you get back on track with the IRS, get into a settlement, or setup a payment with the IRS. Reach out to us now! Make sure tojoin our newsletter for more tips on reducing taxes, and increasing your wealth.

Author information: Trudy M. Howard is a managing member of Howard Tax Prep LLC, a Homewood IL, &  South Loop of Chicago tax preparation and accounting office.

General Information

Three Tips Business Owners Can Use To Avoid 1099-NEC Reporting Penalties.

Howard Tax Prep LLC

Here in our Chicago South Loop Tax Preparation office and our Homewood Il Tax Preparation office, we work with business owners and real estate investors looking to reduce the amount of Federal & state income taxes they’re required to pay. One of the ways we help our clients is to ensure that they deduct all of their expenses, and a major expense for many business owners is the amount paid to independent contractors.

Whenever a business owner or real estate investor uses the services of an independent contractor, the IRS requires that once payments exceed $600, a 1099-NEC must be issued. Although most people know this requirement as a hard and fast rule, there are a few exceptions to the rules (as with most things related to taxation). Keep reading to find out the exceptions.

Tip #1: Choose Contractors That Operate as Corporations
Your business does not have to report payments made to corporations, including S corporations, on Form 1099-NEC (unless the corporation collects attorney fees or payments for health and medical services). This rule also applies to LLCs that elect corporate status for federal tax purposes. If all your independent contractors are corporations or LLCs taxed as corporations for federal tax purposes, you have no 1099 filing requirements. Period!

Tip #2: Make Payments by Credit Card or Third-Party Payment Networks
Don’t report payments made via credit card and/or other third-party platforms such as PayPal on a Form 1099-NEC form. Credit card companies and third-party networks report these payments to the contractors on a Form 1099-K.

Tip #3: Always Get a W-9 Up Front Before Making Any Payments to the contractor
By getting the W-9 upfront before you make a payment to the independent contractor, you guarantee several things:

*** You know whether you have a 1099 filing requirement for the independent contractor because he, she, or it discloses the business type to you.
*** You know whether an LLC is classified as a corporation for federal tax purposes and, therefore, excluded from 1099 reporting.
*** You won’t have to chase the contractor down next year for the required information if you have to file a 1099.

Once you’ve paid the contractor, your leverage for the 1099 information is gone, and the contractor might not give you the information you need (we see this happen all of the time). If you need to issue 1099-NECs for contractors you paid in 2023 or earlier years, we can assist. Click this link to get started on filing 1099-NEC’s for contractors you’ve paid.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, or business compliance assistance please contact us online, or call our office at 855-743-5765. Do you owe the IRS, or your state back taxes? Do you have unfiled tax returns? Is the IRS threatening to garnish your paycheck, or levy your bank account? Are you ready to get back on track with the IRS? Howard Tax Prep LLC will help you get back on track with the IRS, get into a settlement, or setup a payment with the IRS. Reach out to us now! Make sure tojoin our newsletter for more tips on reducing taxes, and increasing your wealth.

Author information: Trudy M. Howard is a managing member of Howard Tax Prep LLC, a south loop of Chicago tax preparation and accounting office.

Family Tax Issues, General Information, REAL ESTATE, Self Employed, tax deductions, Tax Reduction, TAXES

Energy Tax Credits for Homeowners

Howard Tax Prep LLC
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Here in our Chicago South Loop Tax Preparation office, and our Homewood Il Tax Preparation office, we work with homeowners and real estate investors that are looking to save on their taxes. As we always say, when it comes to taxes, the best tax benefit is a tax credit, because you receive the amount on a dollar-for-dollar basis, versus tax deductions which only slightly reduce your taxable income. To say it another way, a $2,000 tax credit saves you $2,000 in taxes.

Energy Efficient Home Improvement Credit

Per the IRS, “if you make qualified energy-efficient improvements to your home after Jan. 1, 2023, you may qualify for a tax credit up to $3,200.” The Efficient Home Improvement Credits help homeowners pay for various types of energy efficiency improvements. The credit is 30% of energy property cost up to $1,200, and $2,000 per year for qualified heat pumps, biomass stoves, or biomass boilers. Since more people will qualify for the energy-efficient improvements, we’ve outlined the details below.

  • Exterior doors (energy star approved). Max 2 doors, $250 each, total credit amount $500. Example, door cost $1,300; 30% of $1,300 is $390. Although 30% of the cost is $390, the taxpayer can only get $250 of the $390 (per door up to $500).
  • Exterior windows & skylights that meet Energy Star Most Efficient certification requirements; max credit amount $600.
  • Electric panel upgrades. 30% of the cost up to $600.
  • Home insulation. 30% of the cost up to $1,200.
  • Central air conditioner. 30% of the cost up to $600.
  • Furnace, heat pumps, water heaters, and hot water boilers. 30% of the cost.
  • Home energy audits. 30% of the cost up to $150.
  • Heat pumps, biomass stoves, or biomass boilers. $2,000 per year.

What if I earn a high income?

The great thing about this credit is that even those that earn higher incomes can take advantage of the credit (because there are no maximum income thresholds).

How many times can I claim this credit?

Although the Energy Efficient Home Improvement Credit has a $1,200 annual cap (with limits on specific items), you can claim the credit each year through 2033. Some homeowners are choosing to perform energy efficiency projects over several years, so that they can claim the credit each year.

Will this credit increase my tax refund?

It depends! The credit is nonrefundable, meaning if you don’t owe any tax, you will not receive the credit as a refund check. However, the credit can reduce what you owe, helping you to receive a refund of the income taxes withheld by your employer.

Can I carry this tax over to another year?

No, you can’t carry the credit over to a future tax year.

Who can claim the credit

Homeowners that use the property as their main residence, or as a vacation home. Landlords can NOT take this credit.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, or business compliance assistance please contact us online, or call our office at 855-743-5765. Do you owe the IRS, or your state back taxes? Do you have unfiled tax returns? Is the IRS threatening to garnish your paycheck, or levy your bank account? Are you ready to get back on track with the IRS? Howard Tax Prep LLC will help you get back on track with the IRS, get into a settlement, or setup a payment with the IRS. Reach out to us now! Make sure tojoin our newsletter for more tips on reducing taxes, and increasing your wealth.

Author information: Trudy M. Howard is a managing member of Howard Tax Prep LLC, a south loop of Chicago tax preparation and accounting office.

Family Tax Issues, General Information, tax deductions, TAXES

Is Your Child’s Scholarship Taxable?

Howard Tax Prep LLC
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In our South Loop of Chicago Tax Preparation office, and our Homewood, Il tax preparation office, we have come across many taxpayers with children that are graduating high school, and heading to college. The good news is that many students receive scholarships, but not many people know about the taxable portion of scholarships, so we wrote this blog to help taxpayers get a

For many students, scholarships are an important part of a financial aid package, and they can significantly reduce the burden of higher education costs. While scholarships are generally viewed as a financial windfall, it’s important to understand that not all scholarship funds are tax-free. The U.S. Internal Revenue Service (IRS) imposes taxes on certain portions of scholarships, and being aware of these taxable portions can help students and their families avoid unexpected tax liabilities.

Tax-Free Portions of Scholarships

According to the IRS, “a scholarship or fellowship grant is tax-free only to the extent it:

  1. Doesn’t exceed your qualified education expenses;
  2. Isn’t designated or earmarked for other purposes (such as room and board);
  3. Doesn’t require (by its terms) that it can’t be used for qualified education expenses;
  4. It doesn’t represent payment for teaching, research, or other services required as a condition for receiving the scholarship.”

To qualify as tax-free, the scholarship or fellowship must be used for:

  1. Qualified Education Expenses: These include tuition and fees required for enrollment or attendance at an eligible educational institution.
  2. Required Course-Related Expenses: This category encompasses books, supplies, and equipment required for courses at the educational institution.

In addition to the above requirements, the recipient must be a candidate for a degree at an eligible educational institution.

Taxable Portions of Scholarships

Portions of scholarships that do not meet the criteria for qualified education expenses are considered taxable income. The IRS outlines several scenarios in which scholarship funds become taxable:

  1. Room and Board: Scholarships used to pay for room and board, including meal plans and housing costs, are taxable. These living expenses are not considered qualified education expenses.
  2. Travel and Research: Funds used for travel, research, and other non-essential expenses not required for enrollment or course attendance are also taxable.
  3. Stipends and Payments for Services: If a scholarship or fellowship includes stipends or payments for teaching, research, or other services required as a condition for receiving the scholarship, these amounts are taxable. This often applies to graduate students who receive compensation in exchange for their teaching or research services.

Reporting and Paying Taxes on Scholarships

Students receiving scholarships must be diligent in reporting the taxable portions on their tax returns. Here are the steps to ensure compliance:

  1. Documentation: Keep detailed records of all scholarship funds received and how they were spent. This includes receipts for tuition, fees, books, and other educational materials.
  2. Form 1098-T: Educational institutions typically provide Form 1098-T, which details the amount billed for qualified tuition and related expenses. Use this form to help determine the taxable portion of the scholarship.
  3. Tax Filing: Report the taxable portion of the scholarship on your federal income tax return. For most students, this involves including the taxable amount on Form 1040 or 1040-SR.

Conclusion

Understanding the taxable portion of scholarships is crucial for students navigating the financial aspects of their education. While scholarships provide significant financial relief, being aware of the IRS rules ensures that students remain compliant with tax laws and avoid unexpected tax bills. By differentiating between qualified and non-qualified expenses, the IRS maintains the integrity of tax-free scholarships and ensures they serve their intended educational purpose.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, or business compliance assistance please contact us online, or call our office at 855-743-5765. Do you owe the IRS, or your state back taxes? Do you have unfiled tax returns? Is the IRS threatening to garnish your paycheck, or levy your bank account? Are you ready to get back on track with the IRS? Howard Tax Prep LLC will help you get back on track with the IRS, get into a settlement, or setup a payment with the IRS. Reach out to us now! Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Author information: Trudy M. Howard is a managing member of Howard Tax Prep LLC, a south loop of Chicago tax preparation and accounting office.

General Information, REAL ESTATE, RUNNING YOUR BUSINESS, Self Employed, tax deductions, TAXES

How to write off startup cost/ expenses on a rental property.

Howard Tax Prep LLC

In our South Loop of Chicago Tax Preparation office, and our Homewood, Il tax preparation office, we often encounter taxpayers who want to generate additional revenue without having to take on a second job or a time-consuming activity. In most cases, taxpayers express an interest in becoming a commercial or residential landlord; however, prior to becoming a rent-collecting landlord, you’ll likely have to spend a lot of money researching and preparing the property for rental. The good news is that the tax code treats some of those monies as start-up expenses.

What Are Start-Up Expenses?
“Start-up expenses” are certain costs (money spent) you incur before a new business begins. In the case of a rental property business, these are costs incurred before you offer the property for rent.

Unlike operating expenses (the cost you spend on monthly bills such as internet, rent, office software etc.) for an existing business, start-up expenses can’t automatically be deducted in a single year because the money you spend to start a new rental (or any other) business is a capital expense—a cost that will benefit you for more than one year.

Normally, you can’t deduct start-up expenses until you sell or otherwise dispose of the business. But a special tax rule allows you to deduct up to $5,000 in start-up expenses the first year you are in business, with the remaining cost being deducted over the next 15 years.

There are two broad categories for startup cost:

  1. Investigatory–Cost incurred as part of a general search to determine whether to acquire or enter a new business and which new business to enter. For example, you may deduct fees paid to a market research firm to analyze the demographics, traffic patterns, and general economic conditions of a neighborhood.
  2. Pre-opening costs, such as advertising, office expenses, salaries, insurance, and maintenance costs.

Your cost of purchasing a rental property is not a start-up expense. Rental property and other long-term assets, such as furniture, must be depreciated (cost spread out over time) once the rental business begins.

On the day you start your rental business, you can elect to deduct your start-up expenses.

The deduction is equal to

  • the lesser of your start-up expenditures or $5,000, reduced (but not below zero) by the amount by which such start-up expenditures exceed $50,000, plus
  • amortization of the remaining start-up expenses over the 180-month period beginning with the month in which the rental property business begins.

When you file your tax return, you automatically elect to deduct your start-up expenses when you label and deduct them on your Schedule E (or other appropriate return).

Additionally, travel expenses to get your rental business going are deductible start-up expenses with one important exception: travel costs to buy the targeted rental property are not start-up expenses. Instead, they are capital expenses that must be added to the cost of the property and depreciated.

Costs you pay to form a partnership, limited liability company, or corporation are not part of your start-up expenses. But under a different tax rule, you can deduct up to $5,000 of these costs the first year you’re in business and amortize any remaining costs over the first 180 months you are in business.

Note that the cost of expanding an existing business is a business operating expense, not a start-up expense. As long as business expansion costs are ordinary, necessary, and within the compass of your existing rental business, they are deductible.

The IRS and tax court take the position that your rental business exists only in your property’s geographic area. So, a landlord who buys (or seeks to buy) property in a different area is starting a new rental business, which means the expenses for expanding in the new location are start-up expenses.

You can’t deduct start-up expenses if you’re a mere investor in a rental business. You must be an active rental business owner to deduct them.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, or business compliance assistance please contact us online, or call our office at 855-743-5765. Do you owe the IRS, or your state back taxes? Do you have unfiled tax returns? Is the IRS threatening to garnish your paycheck, or levy your bank account? Are you ready to get back on track with the IRS? Howard Tax Prep LLC will help you get back on track with the IRS, get into a settlement, or setup a payment with the IRS. Reach out to us now! Make sure tojoin our newsletter for more tips on reducing taxes, and increasing your wealth.

Author information: Trudy M. Howard is a managing member of Howard Tax Prep LLC, a south loop of Chicago tax preparation and accounting office.

business taxes, Family Tax Issues, General Information, RUNNING YOUR BUSINESS, Self Employed, TAX DEBT RELIEF, Tax Reduction, TAXES

Will The IRS Accept Your “Reason Why” & Waive Penalties?

Howard Tax Prep LLC
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In our South Loop of Chicago Tax Preparation office, and our Homewood, Il tax preparation office, we often come across taxpayers who haven’t filed their tax returns in quite some time. However, once a taxpayer chooses to file back tax returns, the IRS and the state Department of Revenue will assess the tax due along with penalties and interest. Although not often discussed, in some cases, the IRS can waive penalties assessed against you or your business if there was “reasonable cause” for your actions.

The IRS permits reasonable cause penalty relief for penalties arising in three broad categories:

  1. Filing of returns
  2. Payment of tax
  3. Accuracy of information

Contrary to what you might think, the term “reasonable cause” is a term of art at the IRS. This seemingly simple phrase has a precise and detailed definition as it relates to penalty abatement.

Here are three instances where you might qualify for reasonable cause relief:

  1. Your or an immediate family member’s death or serious illness or your unavoidable absence
  2. Inability to obtain necessary records to comply with your tax obligation
  3. Destruction or disruption caused by fire, casualty, natural disaster, or other disturbance

Here are five instances where you likely do not qualify for reasonable cause penalty relief:

  1. You made a mistake.
  2. You forgot.
  3. You relied on another party to comply on your behalf.
  4. You don’t have the money.
  5. You are ignorant of the tax law.

What If the IRS Rejects My Request?

You should consider requesting an appeal if the IRS denies your initial request. There is a saying among tax professionals: “The deals are in appeals.”
One reason to appeal is that if you have a complex case, the IRS might not have considered all the aspects of your explanation.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, or business compliance assistance please contact us online, or call our office at 855-743-5765. Do you owe the IRS, or your state back taxes? Do you have unfiled tax returns? Is the IRS threatening to garnish your paycheck, or levy your bank account? Are you ready to get back on track with the IRS? Howard Tax Prep LLC will help you get back on track with the IRS, get into a settlement, or setup a payment with the IRS. Reach out to us now! Make sure tojoin our newsletter for more tips on reducing taxes, and increasing your wealth.

business taxes, Family Tax Issues, General Information, Self Employed, signing agent, Tax Reduction, TAXES

Enrolling your child in summer camp? You might be entitled to a tax credit.

Howard Tax Prep LLC
Photo by RDNE Stock project on Pexels.com

Here in our Chicago South Loop Tax Preparation, and our Homewood Il, Tax preparation offices, we specialize in helping taxpayers legally reduce their taxable income, claim every tax deduction they are entitled to, and maximize tax credits. Through our work of helping taxpayers, we’ve come to find that many people often miss the Federal Child and Dependent Care Credit. The Federal child and dependent care tax credit refunds taxpayers a portion of the expenses paid for the care of dependent children and other dependents (qualifying persons). 

Since summer is almost here, we wanted to give you some tips on what you need to do to claim the federal Child and Dependent Care credit if you have children (or disabled siblings/parents that you care for) that you plan on enrolling into a summer DAY camp program (so that you can work, or look for work). You’ll notice that we’ve put emphasis on summer DAY camp programs, as overnight summer camp programs are not eligible for the credit. Below please find some key points to claiming the Federal Child and Dependent Care Credit.

🔶The credit is equal to a percentage (from 35%-20%) of the amount you paid for daycare or summer camp attendance, and daycare throughout the year (up to $6,000 for 2 children, & $3,000 for 1 child). However, if you have 2 qualifying children, and paid expenses of $6,000 for only 1 child, you would be able to use the entire $6,000 to figure your credit, even though you only paid expenses for 1 child. To illustrate, Susan is a single mother earning $40,000 a year and has 2 children ages 8 & 12. The local park district is offering an 8-week summer day camp for $100 a week per child totaling $1,600 ($800 per child). Throughout the year, the 8-year-old goes to an afterschool daycare that charges $85 a week for 40 weeks totaling $3,400. At tax time Susan calculates that she paid a total of $5,000 in dependent care expenses, and her income level entitles her to a 22% reimbursement ($1,100) of the amount paid for care. If Susan has a $4,000 tax liability and was receiving a $500 refund, the $1,100 dollar-or-dollar tax credit will reduce her tax liability to $2,900 and increase her tax refund to $1,600.

🔷You must have earned income. Earned income is defined as W2 Income, rideshare driving, food delivery person, MLM business, self-employment, etc. 

🔶The provider must provide you with their name, EIN (unless it’s a tax-exempt organization like a church or school), and address. 

🔷You must provide your tax professional with the amount paid to the provider PER CHILD. 

🔶The dependent(s) must be age 13 or under. 

🔷You must be the custodial parent. 

🔶There are no minimum or maximum income limits on this credit. 

🔷If your filing status is married filing separately, you must have lived apart from your spouse for the last 6 months of the year. You don’t have to be legally separated, but you must be able to prove that you lived apart from your spouse. 

🔶 Sometimes you can file married filing separately, and the person may not qualify as your dependent for head of household status, earned income credit, etc., but they can still qualify as your person for the Federal Child and dependent care credit tax credit. For example, you left your cheating spouse in May, and you’re the primary caregiver for your disabled sister. Your disabled sister receives a monthly dividend check of $400 from her ownership of Ford stock (left to her by your parents). While your sister isn’t your qualifying dependent because her gross income is more than $4,400, you can still claim the child and dependent care credit for any dependent care expenses that you pay on her behalf. 

Although we’ve given you the basics, this article is not all-inclusive. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Business Strategies, business taxes, General Information, notary, RUNNING YOUR BUSINESS, Self Employed, signing agent, Tax Reduction, TAXES

Everything you need to know about side income, business income, & self employment taxes.

Howard Tax Prep LLC

Here in our Chicago South Loop Tax Preparation, and our Homewood Il, Tax preparation offices, we specialize in helping business owners and real estate investors reduce their tax liability. One topic that always comes up is the topic of self-employment taxes. Regardless of age, all individuals with self-employment income must pay self-employment taxes. Even if you have a regular W2 job, if you earn additional income through a side gig, then you have self-employment income. Self-employment income can be earned through rideshare (Uber or Lyft) driving, delivery driver (Doordash, GrubHub, Instacart, etc.) work, independent contractor work (construction, life insurance sales, cleaning business, etc.) selling things online (Mercari, Eba, Amazon, etc.) or simply selling dinners out of your home.

The government claims that the reason self-employed workers need to pay self-employment taxes (in addition to income taxes), is so that when business owners reach retirement age, they’ll be able to collect Social Security and Medicare part A (hospital insurance) benefits if they paid self-employment taxes for at least 10 years (40 quarters). It is important to note that self-employment taxes are paid on your net earnings from self-employment, not your entire business income. In this article, we will discuss:

  • What is the self-employment tax
  • How Much Are Self-Employment Taxes?
  • Do employees pay less in tax than self-employed people?
  • Individuals Subject to Self-Employment Taxes.
  • Net Earnings from Self-Employment.
  • What happens if I own two businesses?
  • What happens if you work a job and have side self-employment income?
  • Will having self-employment income allow me to write off everything?
  • Income Not Subject to Self-Employment Taxes.

If you own an unincorporated business, you likely pay at least three different federal taxes. These three taxes are:

  • Federal income taxes.
  • Social Security taxes.
  • Medicare taxes.

Social Security taxes and Medicare taxes are collectively called self-employment taxes.

The self-employment tax totals 15.3% and has two parts:

1.) 12.4 percent Social Security tax up to an annual income ceiling adjusted for inflation each year ($147,000 for 2022)
2.) 2.9 percent Medicare tax on all net earnings from self-employment.

If your self-employment income is more than $200,000 (if you’re single) or $250,000 (if you’re married filing jointly), you must pay an additional 0.9 percent Medicare tax on self-employment income over the applicable threshold for a total 3.8 percent Medicare tax.

Do employees pay less in taxes than self-employed people?

Excluding the additional Medicare tax that’s levied solely on employees, the self-employment tax rate is the same as the combined Social Security and Medicare payroll tax paid by employees and employers. But with employment, employers pay half of the taxes while withholding the other half from their employees’ wages.

At first glance, it looks as if W-2 employees personally pay half as much as the self-employed. But that’s not so. The tax code allows the self-employed to make up for some of this unfairness by allowing them to reduce net income subject to self-employment taxes by 7.65 percent and deduct on their Form 1040 half of their self-employment taxes.

Individuals Subject to the Self-Employment Tax.

You pay self-employment tax if you:

  • operate as a single-member LLC.
  • earn income on a 1099-NEC.
  • operate as a single-member LLC.
  • do business as a sole proprietor.
  • are a general partner in a partnership.
  • are an LLC member in a multi-member LLC.
  • or are a co-owner of any other business entity taxed as a partnership (there is an exemption for limited partners).

You determine if your activity is a business under the same rules you use for deducting business expenses. The general rule is that a business is an activity you engage in regularly and continuously to earn a profit. You don’t have to work at a business full-time, but it can’t be a sporadic activity.

Net Earnings from Self-Employment.

The self-employment tax is not a progressive tax. It starts immediately—on dollar one, once you have over $433 in Schedule C, E, or F net income from a business ($433 x 92.35 activity = $400 which is the starting amount that requires reporting of self-employment income, & the payment of self-employment taxes).

Example. Nancy earns $1,000 from her single-member LLC, and reports this income on Schedule C. Her net earnings from self-employment are $935 ($1,000 x 92.35 percent). Her self-employment tax is $143 ($935 x 15.3 percent).

Your net earnings from self-employment start with the gross income from your trade or business minus valid allowable business deductions. Because you get to deduct valid business expenses, it makes it even more important to keep up with your bookkeeping, so that you can identify the expenses that will allow you to lower your income tax and self-employment tax.  It’s important to note that, personal itemized deductions (charity donations, property taxes, medical expenses, etc.) and “above-the-line” adjustments to income don’t decrease net earnings from self-employment.

What happens if I own two businesses?

If you have more than one business (say two Schedule Cs), you combine the net income or loss to determine your net earnings from self-employment. Thus, a loss from one business offsets the income from another profitable business. But all is not roses: when calculating net earnings from self-employment, you may not deduct:

  • Net operating loss carryovers from past years,
  • Deduction for health insurance premiums for the self-employed,
  • Contributions to a self-employed retirement plan such as an IRA, SEP-IRA, or 401(k).
  • Section 199A qualified business income deduction.
  • Deduction for one-half of your self-employment taxes.

What if I Have Both W-2 Wages and Self-Employment Income?

If you earn both W-2 wages and self-employment income, you count your W-2 first as if you had no self-employment income. If your W-2 wages exceed the annual ceiling ($147,000 in 2022), no Social Security taxes are due on any of your self-employment income. In this case, you pay less in taxes under the ordering rule because it allows you to use all or part of the Social Security wage ceiling with your employee income (taxed at 6.2 percent).

Will having self-employment income allow me to write off everything?

Despite what some may believe, becoming self-employed will NOT allow you to

  • Write off all your meals as a business expense.
  • Write off all the utility bills in your home.
  • Write off 100% of your cell phone usage.
  • Deduct the cost of taking your friends to sporting events or bars.
  • Deduct all your travel and transportation expenses.
  • Write off the entire cost of owning or renting a residence that contains your home office.

Some types of income are not subject to self-employment tax at all, including:

  • most rental income,
  • most dividend and interest income,
  • gain or loss from sales and dispositions of business property, and
  • S corporation distributions to shareholders.

S Corporation Distributions

The income earned by an S corporation passes through the business to the individual shareholders as dividends or distributions. Such pass-through S corporation income is not trade or business income to the shareholders and is not subject to self-employment taxes.

Key point. The S corporation is the one business form that can save its owners substantial self-employment taxes, which is why it is so popular. However, most first starting out don’t need a S-Corp as the cost to maintain the S-Corp, payroll, and bookkeeping will outweigh the benefits until you net at least $35,000-$40,000.

Example Jason owns a landscaping business that generates $100,000 in net profit. If he operates as a sole proprietor, 92.35 percent of his $100,000 net business income is net earnings from self-employment subject to self-employment taxes. Instead, he incorporates his business with him as the sole shareholder and works full-time in the business as the corporation’s employee. Jason has his corporation pay him $60,000 as employee salary, on which payroll taxes must be paid. In addition, the corporation distributes $40,000 to Jason during the year as a distribution. The $40,000 is not subject to self-employment taxes, saving $5,652 in taxes ($40,000 x 92.35 percent x 15.3 percent)

Here are five things to know from this article:

  1. The self-employed must pay a 12.4 percent Social Security tax and a 2.9 to 3.8 percent Medicare tax on their net earnings from self-employment.
  2. The 12.4 percent Social Security tax is subject to an annual income ceiling ($147,000 for 2022).
  3. You must pay self-employment taxes if you earn income from a business, side hustle, or side gig that you report on Schedule C or F, co-own as a general partner in a partnership, or own as a member in a multimember LLC, or if you co-own any other business entity taxed as a partnership.
  4. Net earnings from self-employment do not include real estate rental income (unless you provide services to tenants), dividend or interest income, or gain or loss from business property other than inventory.
  5. Distributions from S corporations are not subject to self-employment taxes. S corporations must ordinarily treat shareholders who work in the corporate business as employees and pay them a reasonable W-2 salary

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.