Category: Tax Reduction

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.

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

Energy Tax Credits for Homeowners

Howard Tax Prep LLC
Photo by Ksenia Chernaya on Pexels.com

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.

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
Photo by Ketut Subiyanto on Pexels.com

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.

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

IRS Denies Residential Contractors $99,275 in Business Expenses.

Howard Tax Prep LLC
Photo by Anamul Rezwan on Pexels.com

Here in our South Loop of Chicago Tax Preparation office, and our Homewood, Il tax preparation office, we specialize in tax preparation for real estate investors, and small business owners. Working with this client base, we come across many general contractors that operate 95% in cash. Although cash only taxpayers are entitled to tax deductions, they (like every other taxpayer) must have proof of income received, and proof of expenses incurred. While in most cases we can help taxpayers reconstruct their income and expenses, in some cases the IRS will deny the expenses due to lack of documentary (paper) evidence. In the tax court case of NNABUGWU C. EZE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, not only did the taxpayer lack documentary evidence for expenses, he also didn’t have proof of income received.

In 2015, and 2016 NNABUGWU C. EZE, owned and operated 2 sole proprietor businesses: a consulting business, and a residential construction business (while we’ll touch on issues related to the consulting business, the main focus of this article will be the residential construction business). “For 2015 he reported taxable income of $3,314 and claimed a refund of $774. For 2016 he reported taxable income of zero and claimed a refund of $744.”1 For his consulting business, Eze claimed to have generated $142,675 in gross revenue, $30,533 in auto expenses, 2,815 in business travel, and $9,662 in other expenses.2 While his auto expenses were high, the return might have avoided audit had Mr. Eze not reported that his construction business spent $99,275 (business expenses) to generate $27,875 in gross revenue. In the court opinion, the court noted that Mr. Eze:

  • Described his Schedule C2 business as “home improvement.”
  • Allegedly “did handyman, construction, and residential rehabilitation projects for individual customers.”
  • Claimed to have written contracts with his customers, but never produced the contracts into evidence.
  • Didn’t specify how he was paid by his customers, or what type of arrangements he had with his customers.

The court also noted that:

  • There was no proof of electronic or paper (documentary evidence) invoices being submitted to customers.
  • There were no bank statements to prove the income or expenses claimed on his schedule C profit and loss.
  • None of his alleged customers reported payments to him on Forms 1099-MISC, Miscellaneous Income.
  • As in typical fraudulent tax return behavior, the expenses reported on the tax return far exceeded the reported income.

Auto Deductions

When it comes to the business use of a vehicle, one of the best tax deductions for business owners is the ability to deduct either mileage, or actual expenses. In this case, Mr. Eze owned 3 vehicles: “a 2008 Mercedes Benz, a 2002 Ford SUV, and a 2004 Chrysler.”3 Mr. Eze testified that the Mercedes was used 100% in his consulting business; the Ford was used 100% in his residential construction business, and that he used the Chrysler “exclusively for personal and family purposes.” To prove that he drove the business mileage, Mr. Eze submitted a calendar with the places that he allegedly drove to for his consultation business, and a second calendar with drives for his construction business. Although Mr. Eze created the calendars, he couldn’t explain how he was able to remember information from 3-4 years ago. “When asked asked how he kept track of start and finish odometer readings for hundreds of trips, Mr. Eze said that he jotted them down on scraps of paper (since discarded)”4 to which the IRS responded kick rocks (okay, they actually said “we do not find that testimony credible”, but we like our version better). Since Mr. Eze couldn’t prove his business mileage (see our video here on how to prove business mileage), the mileage deduction wasn’t allowed.

Construction Expenses

To prove his construction material expenses, Mr. Eze submitted receipts from Home Depot, Lowes, and 84 lumber. While under oath, Mr. Eze stated that all of the purchases were not made by him, but some were made by his wife, and “maybe somebody else.”5 We find it odd that Mr. Eze can remember all of his business mileage locations from 4 years prior, but he can’t remember who the “somebody else” was that purchased materials from Home Depot. Some of the issues the court took with Mr. Eze material purchases were as follows:

  • All receipts are for cash purchases in excess of $5,000. Mr. Eze said he withdrew the money from his bank, yet he didn’t provide any bank statements, or record that would prove that. 6
  • He claimed to spend $175,000 for materials for a business that was unprofitable, and he somehow still paid his mortgage, private school tuition, and took care of 2 children. 7
  • The receipts for materials often show large-volume purchases- on the order of 200 pieces of lumber, 50 sheets of gypsum wallboard, and 100 gallons of paint. These volumes vastly exceeded what would have been needed for the projects shown on petitioner’s mileage log.8
  • The receipts often show purchases of items that petitioner could not possibly have used in any project that he allegedly undertook during the ensuing months. For example, the receipts show purchases of bathtubs, shower units, and refrigerators, but petitioner could not identify any project that would have required installation of such items. He testified that he made advance purchases of these materials and stored them in his garage until he needed them.9
  • Petitioner allegedly spent more than $21,000 on tools, but he was unable to explain the function or intended operation of many machines and tools listed on the receipts. He said that he could not remember what these things were used for, having purchased them years ago.10

As we read further into this case, it was clear to us that Mr. Eze thought that the IRS, and the courts were either stupid, or that they wouldn’t look at the documentation he provided. To illustrate, in one instance, Mr. Eze tried to claim the tuition that he paid for his daughter’s tuition as a business education expenses. He also claimed AT&T cellphone expenses of over $2,000, but the AT&T bills submitted covered tv and internet service. Mr. Eze also submitted payments to cricket wireless, claiming that although he didn’t receive invoices from the company “he knew what he owed each month.”

While social media (TikTok, YouTube, & Facebook video’s) will have you believing that you can magically turn personal expenses into business tax deductions (by simply creating a LLC), the truth is that taxpayers have to prove that they are entitled to any business or personal tax deductions claimed. Although courts do have the power to allow approximations (under the Cohan rule if an expense is reasonable), there must be some factual basis for the estimate, and the deduction must not be subject to increased substantiation rules.

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.

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

IRS says that some PPP (Paycheck Protection Program) loans that were forgiven improperly, are taxable.

Howard Tax Prep LLC
Photo by RODNAE Productions on Pexels.com

The IRS recently issued guidance addressing improper forgiveness of a Paycheck Protection Program loan (PPP loan).

To summarize, the guidance says that if a taxpayers PPP loan is forgiven based upon lies, or leaving things out (misrepresentations or omissions) the taxpayer cannot exclude the forgiven loan income from taxation; basically, you will have to pay taxes on the loan amount that you received.

According to the IRS, while many small business owners were entitled to receive the loan (and properly claimed the PPP loan forgiveness), there are many taxpayers who weren’t eligible for the loan, or loan forgiveness. Some taxpayers lied to receive the PPP loan funds, while other’s spent the loan proceeds on ineligible items.

Per IRS Issue Number IR-2022-162: “Under the terms of the PPP loan program, lenders can forgive the full amount of the loan if the loan recipient meets three conditions. 

1 – The loan recipient was eligible to receive the PPP loan.  An eligible loan recipient:

  • is a small business concern, independent contractor, eligible self-employed individual, sole proprietor, business concern, or a certain type of tax-exempt entity; 
  • was in business on or before February 15, 2020; and
  • had employees or independent contractors who were paid for their services, or was a self-employed individual, sole proprietor or independent contractor.

2 – The loan proceeds had to be used to pay eligible expenses, such as payroll costs, rent, interest on the business’ mortgage, and utilities.

3 – The loan recipient had to apply for loan forgiveness. The loan forgiveness application required a loan recipient to attest to eligibility, verify certain financial information, and meet other legal qualifications.

If the 3 conditions above are met, then under the PPP loan program the forgiven portion is excluded from income.  If the conditions are not met, then the amount of the loan proceeds that were forgiven but do not meet the conditions must be included in income and any additional income tax must be paid.”

Per IRS Issue Number IR-2022-162: “Taxpayers who inappropriately received forgiveness of their PPP loans are encouraged to take steps to come into compliance by, for example, filing amended returns that include forgiven loan proceed amounts in income.” In essence, if you know that you lied about how you spent the PPP (paycheck protection program) funds, take the lie back by amending (changing) your tax return to reflect the truth.

IRS Commissioner Chuck Retting said: “This action underscores the Internal Revenue Service’s commitment to ensuring that all taxpayers are paying their fair share of taxes.” “We want to make sure that those who are abusing such programs are held accountable, and we will be considering all available treatment and penalty streams to address the abuses.”

If you, or someone you know had a person “do your PPP loan” (complete the application, and get you the funds), and you need assistance with amending your tax return, please reach out to us for assistance.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, need help with tax debt, business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth. Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!


business taxes, Family Tax Issues, General Information, TAX DEBT RELIEF, Tax Reduction, TAXES

HIDING INCOME FROM THE IRS? HOW WILL THEY FIND OUT?

Howard Tax Prep LLC
Photo by Min An on Pexels.com

In our South Loop Chicago tax preparation office, and in our Homewood, Il tax preparation office, we often receive calls from people that have not filed taxes in years, and they want to know how the IRS knows how much income they have receive. So how does the IRS know when a small business owner is POTENTIALLY hiding income? The IRS has many methods to detect the underreporting of income such as: taxpayer interviews, income probes, Indirect methods, accounting records; QuickBooks files, cash expenditures, bank deposits, net worth, and more; however, this article will be covering a method called the vertical analysis.

The vertical analysis method identifies the differences between gross income, and net profit reported by the business owner, and the industry standards gross income and net profit. In plain English, the IRS compares what businesses owners say their profit is in relation to expenses, to what other people in the same industry say their profit is in relation to expenses. So what data, or statistics does the IRS use to create the comparison? The IRS uses a website called Bizstats.

Information in Bizstats expresses expense categories as a percentage of revenue. Per the IRS “Potential underreporting of income which equals 10% or more of the reported income should be resolved with the taxpayer’s assistance.”

Schedule-button-nb

To give an example, let’s say that we have a caterer that reports $65,000 in gross sales, and $50,000 in expenses, leaving them with a profit of $15,000. The caterer’s expenses to sales ratio is 77% ($50,000 in cost to make sales (expenses)/revenue brought in.) If the industry standard is 60%, the IRS might believe that the taxpayer is hiding an additional $18,333 in revenue (50,000/60%=$83,333. $83,333-$65,000=$18,333).

So who is Bizstats? Per their website, “BizStats is owned and operated by Bizminer of Camp Hill, PA, a leader in online data analysis since 1998. Bizminer also publishes more than 9 million local and national industry statistical reports at its own web site at www.bizminer.com” Bizstats has business statistics and financial ratios for Sole proprietors, Corporations, S-Corporations, & Partnerships.

Where does Bizstats get it’s information? Per their website, Bizstats get it’s data from “the latest available IRS financial information in a useful, readable format.”

What are some drawbacks to Bizstats data? Bizstats are only available for 1 year, and the information is typically 3 years old. At the time of publication, the current stats were showing data from 2017.

How can I protect myself from a vertical analysis?

#1 Always report the GROSS income generated in your business. An accounting mistake that we often see in our Chicago South Loop tax preparation office, is that people don’t do bookkeeping, so instead of reporting their gross receipts, they report gross income less returns, refunds, etc. in the gross receipts area, which is not correct. Gross receipts are gross receipts, and you account for returns in a separate line item.

#2. Invoice clients, or keep copies of receipts if you’re in a business that doesn’t use invoicing.

#3. NEVER COMMINGLE YOUR FUNDS. Your business income and expenses need to be kept separate

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, need help with tax debt, business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth. Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

P.S. For wealth building and tax reduction tips, please join Howard Tax Prep LLC  newsletter! 

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

Two Ways to Fix Tax Return Mistakes Before the IRS Discovers Them.

Howard Tax Prep LLC

In our South Loop Chicago tax preparation office, and in our Homewood, Il tax preparation office, we often receive calls from people that have made an error (or errors) on their tax return. The tax law is complicated and constantly changing, so it’s easy to make a small, or large error that causes you to:

1.) underpay your tax, leaving you open to IRS penalties, or
2.) overpay your tax, meaning you gave a gift to the government.

However, if you made an error on your tax return, don’t worry; there’s good news: you can undo your mistake! Here’s even better news: there are two special ways to fix your incorrect tax return that will save you from paying more to the IRS than you would otherwise. We’ll tell you all about them in this article. —there are two easy ways to fix it:

  1. A superseding return
  2. A qualified amended return

A superseding return is an amended or corrected return filed on or before the original or extended due date. The IRS considers the changes on a superseding return to be part of your original return.

A qualified amended return is an amended return that you file after the due date of the return (including extensions) and before the earliest of several events, but most likely when the IRS contacts you with respect to an examination of the return. If you file a qualified amended return, you avoid the 20 percent accuracy-related penalty on that mistake.

Superseding Return Example

You file a joint Form 1040 tax return electronically on February 21, 2022, for tax year 2021, but you later decide you want to file a separate return. Since the joint-filing election is irrevocable, on or before April 15, 2022 (which is the unextended due date for your 2021 Form 1040), you must file a superseding return to undo the joint election.

IRS electronic filing rules for amended returns do not permit you to file this superseding return electronically, because you are changing your filing status (from married, filing jointly, to married, filing separately). That being said, your only other option is to use “snail mail.” Using a paper return via snail mail, you’ll submit either:

1.) A second original Form 1040 return using the married-filing-separately filing status, or
2.) An amended Form 1040X showing the change from joint to separate filing status.
Be sure to write “SUPERSEDING RETURN – IRM 21.6.7.4.10” in red at the top of page 1 of either Form 1040 or Form 1040X.

Qualified Amended Return Example

You realize your return preparer left a $30,000 IRA distribution off your 2019 tax return. Ouch!
Let’s assume you are in the 32 percent tax bracket and had no federal income tax withholding on the distribution: you owe an additional $9,600 in federal income tax on your 2019 tax return due to this distribution.

If you file an amended return before the IRS contacts you about the missing income, then it’s a qualified amended return, and you avoid $1,920 (20percent of $9,600) in audit penalties.

If you don’t file the amended return, and if the IRS contacts you about the missing income, the IRS will propose the $1,920 penalty. You may be able to request penalty relief, but you’ll have to make your case, and the facts may or may not be on your side.

In both circumstances, you’ll also pay interest on the $9,600 back to July 15, 2020 (the COVID-19-postponed 2019 Form 1040 due date). Of course, the earlier you pay the tax, the less interest you’ll accrue. You’ll pay less interest with a qualified amended return because you’re paying the tax sooner.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, need help with tax debt, business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth. Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!