Tag: TAXES

General Information, REAL ESTATE, RUNNING YOUR BUSINESS

Illinois Just Banned These Landlord Fees — What You Need to Do Before July 1, 2026

Howard Tax Prep LLC

Published: April 10, 2026  |  By Howard Tax Prep LLC  |  Category: Landlord Tax Tips

At our Chicago tax preparation office for landlords, real estate investors, and small business owners, we assist landlords with tax planning to reduce their tax burden. Because we specialize in landlord and real estate investor tax preparation, we must stay abreast of laws affecting landlords. The following are things you need to know about bill HB3564 with amendments 3,7, & 8.

If you own residential rental property in Illinois, a new law just passed that directly affects what you can charge your tenants — and the clock is already ticking.

The law takes effect July 1, 2026. That gives you less than three months to get your leases, your application process, and your fee structures in order.

Here’s exactly what’s banned, what it means for your rental business, and what you need to do right now.

The Fees That Are Now Banned

This is the section most landlords need to read carefully. The following fees are prohibited outright — meaning you cannot charge them under any circumstances once the law takes effect.

Application and Screening Fees

You can no longer charge any fee for processing, reviewing, or accepting a rental application. The only fee related to tenant screening that survives is a background check fee — and that one comes with strict conditions:

  • Fee cap: Cannot exceed $50. If the actual cost from the third-party screening provider exceeds $50, you may charge more — but you must pay the cost upfront, bill the tenant within 14 days, and provide a receipt. Miss that 14-day window and the tenant owes nothing.
  • Waiver required: If an applicant provides a background check from within the past 30 days, you must waive the fee entirely.
  • No eviction for non-payment: Failure to pay the background check fee cannot be used as grounds for eviction.

Maintenance and Service Fees

Every one of the following maintenance-related fees is banned:

  • After-hours maintenance fees: No fee for after-hours service requests
  • Contact fees: No fee for calling or contacting the building owner or property manager — for any reason related to the tenancy
  • Travel fees: No fee for travel to complete repairs or work on the unit
  • Hotline fees: No fee for providing a tenant hotline
  • Routine maintenance fees: No fee for routine upkeep or repairs
  • Pest removal fees: No fee for pest removal or abatement
  • Inspection fees: No fee for an in-person inspection at move-in or move-out

Administrative and Lease Fees

  • Lease modification or renewal fees: No fee for modifying or renewing a lease
  • Eviction notice fees: No fee for serving an eviction notice or filing an eviction action before a court order is granted. Note: courts can still award fees at the conclusion of a case.
  • Ancillary screening fees: No fee that duplicates screening costs or is unrelated to actual screening
The Renaming Loophole Is Closed
The law specifically prohibits landlords from renaming a banned fee to avoid these restrictions. You cannot call a maintenance fee a “resident services fee” or a move-in inspection fee an “administrative fee.” If the substance of the fee is banned, the label doesn’t matter.

Move-In and Move-Out Fees: Not Banned, But Completely Restructured

This one surprises a lot of landlords. Move-in and move-out fees are not outright banned — but the way you can charge them has fundamentally changed.

If you want to charge a move-in or move-out fee, here’s what the law now requires:

  • Itemized list required: You must provide the tenant with a written itemized list of all services included in the fee, broken down individually — including any bundled services.
  • Tenant opt-out right: The tenant can opt out of any individual item on the bundled list. They don’t have to take the whole package.
  • Fee capped at actual cost: The total fee cannot exceed the actual estimated cost of the services on that itemized list.

What this means in plain terms: a flat move-in fee charged as a revenue item is gone. If you charge one, it must reflect real documented costs — and your tenant gets to pick what they want from the menu.

Late Fee Rules Have Changed Too

Late fees were also addressed in the final bill. Here’s what the new rules look like:

  • 5-day grace period: You cannot charge a late fee until rent is at least 5 days past due — the earliest you can charge is day 6.
  • Cap on first $1,000 in rent: Late fees cannot exceed $10 on the first $1,000 in monthly rent.
  • Cap above $1,000: Late fees cannot exceed 5% of any rent amount over $1,000.
  • Cannot be used in eviction calculations: Late fees may not be included in the rent amount for purposes of eviction proceedings.

New Transparency Requirements: Your Leases and Listings Must Change

Beyond the fee bans, the law adds disclosure requirements that affect every new lease you sign after July 1, 2026.

  • First-page disclosure: Every non-optional fee — whether one-time or recurring — must be explicitly listed on the first page of the lease. If a fee is not on page one, the tenant is not legally obligated to pay it.
  • Utility disclosure in listings: When advertising a unit for rent, you must clearly state whether utilities are included in the rent.
  • Lease waiver clauses are void: Any clause in a lease that tries to waive these tenant protections is void and unenforceable as a matter of public policy.

If your current lease template was drafted before this law, it almost certainly needs to be updated.

What Happens If You Violate the Law?

Tenants can file a civil lawsuit for violations. Courts can award:

  • Monetary damages
  • Injunctive relief
  • Attorney’s fees and court costs

That last one matters. When attorney’s fees are on the table, it becomes much easier for tenants to find an attorney willing to take a case — including on contingency. This is not a law you want to test.

Who Is Exempt?

Not every landlord is covered. The law does not apply to:

  • Owner-occupied buildings with 6 or fewer units: If you live in the building and it has 6 or fewer units total, you are exempt.
  • Nursing homes and similar institutions: Entrance fees for these facilities are exempt.
  • Existing leases: The law only applies to new or renewed leases entered into after July 1, 2026. Your existing leases are not retroactively affected.

Your Action Checklist: What to Do Before July 1, 2026

Here’s what you should be working on right now:

Update Your Lease Templates

  1. Remove all banned fees — Go through your lease line by line and eliminate any fee that appears on the banned list above: after-hours fees, maintenance fees, contact fees, travel fees, pest removal fees, inspection fees, and lease renewal fees.
  2. Restructure your move-in fee — If you charge one, convert it to an itemized list of actual services and costs. The flat move-in fee as a revenue item is no longer compliant.
  3. Add a first-page fee disclosure section — Create a dedicated section on page one of your lease listing every non-optional fee. If it is not listed there, you cannot collect it.
  4. Update your late fee language — Make sure your lease reflects the new caps and the 5-day grace period requirement.
  5. Remove lease waiver clauses — Delete any language asking tenants to waive their rights under this law. It is void anyway and could create liability.

Update Your Application Process

  1. Eliminate application processing fees — Any fee for reviewing or accepting an application — separate from a background check — must go.
  2. Revamp your background check process — Cap at $50 (or actual cost if higher — but you pay upfront and must bill within 14 days with receipt). Build a process to accept applicant-provided background checks from the past 30 days and waive the fee accordingly.

Update Your Listings

  1. Add utility disclosure to all listings — Every rental listing, online or print, must state whether utilities are included in the rent.

Get Professional Help

  1. Have your updated lease reviewed by an Illinois real estate attorney — Before July 1, 2026, have a licensed attorney review your revised lease template to confirm compliance. This article is informational — not legal advice.

A Note on the Tax Side — This Is Where We Come In

If you have been collecting move-in fees, application fees, or maintenance-related fees as rental income, your revenue picture changes starting July 1, 2026. For cash basis landlords — which describes most of our clients — fees collected are income in the year received. Losing those fee streams means lower gross rental income going forward.

At the same time, costs you previously recovered through fees — pest control, maintenance, after-hours repairs — are now unrecovered expenses. They are still deductible on Schedule E, but now there is no offsetting income. Depending on your passive activity situation, that shift could actually improve your tax position.

If you are planning to raise rents to offset lost fee income, that decision has tax implications worth considering — particularly if you have Section 8/HCV tenants (rent increases require Housing Authority approval and must meet “reasonable rent” standards per HUD guidelines). You also need to consider whether higher rents affect tenant income-qualifying ratios or whether you are near the passive activity loss thresholds under IRC Section 469.

This is exactly the kind of mid-year planning conversation we have with our landlord clients. Reach out if you want to talk through how HB 3564 affects your specific portfolio and tax situation.

⚠ Status Update
As of April 9, 2026, HB 3564 has passed both the Illinois House and Senate and is awaiting Governor Pritzker’s signature. It is expected to be signed. The effective date is July 1, 2026.

Questions? Let’s Talk.

Howard Tax Prep LLC works with Illinois landlords on tax planning, rental income strategy, Schedule E preparation, and the tax implications of legislative changes like this one.

We are not attorneys and this article is not legal advice — for lease compliance questions, please consult a licensed Illinois real estate attorney. But for the tax side of your rental business, we are here.

📧 info@howardtaxprep.com  | 
📞 (855) 743-5765  | 
1800 Ridge Road, Suite 204-2, Homewood, IL 60430

This article is provided for general informational purposes only and does not constitute legal or tax advice specific to your situation. Consult a licensed Illinois real estate attorney for lease compliance questions and a qualified tax professional for advice on your rental tax strategy.

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

IRS AUDITS TAXPAYER 27 YEARS LATER DUE TO TAX PREPARER FRAUD.

Howard Tax Prep LLC

You filed your return. You paid what you owed. You waited three years and assumed that chapter of your life was closed for good. But what if that window never actually closed?

Under a little-known interpretation of the “fraud exception” to the statute of limitations, misconduct by your tax preparer—not you—can keep an IRS audit window open indefinitely. In many courts, it doesn’t matter if you never intended to cheat or never even knew anything was wrong. Because you signed that return, the preparer’s fraud can be imputed to you.

The IRS Knocks—27 Years Later!

Consider the recent case of Murrin v. Commissioner. Stephanie Murrin, a New Jersey resident, filed her 1993–1999 tax returns on time. There was no evidence that she personally intended to evade taxes. However, her preparer, Duane Howell, inserted false items on those returns to understate her tax liability. Howell eventually pled guilty to federal tax fraud in 2007—all without Murrin’s knowledge.

Fast-forward to 2019: Twenty-seven years after those returns were filed, the IRS issued a notice of deficiency. Relying on the fraud exception in Section 6501(c)(1), the IRS bypassed the normal three-year statute of limitations. They asserted that Murrin owed:

  • $65,000 in back taxes
  • $13,000 in penalties
  • Over $250,000 in interest

The government’s position was simple: because the returns were fraudulent (even if the fraud was the preparer’s), the assessment period never closed.

Why “I Didn’t Know” Is Not a Defense

In October 2025, the U.S. Court of Appeals for the Third Circuit affirmed that fraud by a preparer is enough to trigger an unlimited audit window. This follows previous rulings like Allen, Magill, and Kooyers, which emphasize that the taxpayer—not the preparer—has the ultimate responsibility to file a correct return.

In the eyes of the Tax Court, delegating the preparation of your taxes does not delegate your legal responsibility. Ignorance is not a defense.

How to Protect Yourself

To keep decades-old tax returns from coming back to life, you need to be proactive. Here are five ways to protect your future:

  1. Read Your Return Like an Auditor: Compare every line to your W-2s, 1099s, and K-1s. Challenge any “strategy” or deduction you can’t support with paper. If a deduction looks too good to be true, it probably is.
  2. Keep a Long Paper Trail: Since the three-year rule can vanish in fraud cases, you may need to prove your good faith decades later. Keep digital copies of filed returns, workpapers, and emails with your preparer indefinitely.
  3. Be Wary of “Fraud” Language in Agreements: Never sign a stipulation or settlement saying your return was “fraudulent” without understanding the impact. Once fraud is admitted, a 75% civil fraud penalty can attach, and it is nearly impossible to unwind.
  4. Fix Problems Quickly: If you find a mistake, amend and pay as soon as possible. This won’t erase existing fraud, but it shows you aren’t trying to keep an improper benefit and can reduce ongoing interest.
  5. Be Deliberate About Where You Litigate: If the IRS comes knocking on a “forever” audit, the choice of court matters. The Tax Court often rules against the taxpayer in these scenarios, while other courts focus more on the taxpayer’s personal intent. Strategic selection of your legal forum is vital.

The Takeaway

At Howard Tax Prep LLC, we always say: We fix tax problems. But the best way to fix a problem is to prevent it. You are legally responsible for every number on your return. Don’t let a dishonest preparer turn your “three-year window” into a “forever” nightmare.

Is your current preparer giving you answers you can’t support? It might be time for a second opinion.

CLICK HERE TO SCHEDULE A CONSULTATION

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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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.

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
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.

REAL ESTATE, TAXES

Make The Closing Statement Work for You When Buying Rental Property.

Howard Tax Prep LLC

In our South Loop of Chicago Tax Preparation office, and our Homewood, Il tax preparation office, we often come across taxpayers that want to reduce their tax bill and save money (legally). Because we specialize in small business owner and real estate investor tax preparation & tax planning, we often come into contact with new landlords.

Most of your purchase costs when acquiring a rental property will be detailed in the real estate closing statement or the closing disclosure. The closing statement is a financial instrument, not a tax document.

You need to go through each line item in the statement and assign it to one of the three following tax categories:

  • Basis
  • Loan Acquisition
  • Operations

Then, once you have divided your expenditures into these three categories, you often need to consider the best tax strategies for each. For example, in the basis category, you assign costs to land, land improvements, buildings, and personal property. Each dollar assignment has an impact on your profits.

This article provides a useful guide of information to help you build your rental property profits on the day you close escrow.

1. Basis

Generally, your basis (a fancy way of saying the money you put into something) is the total cost you pay for the property, including your costs of obtaining and perfecting the title. Once you have this total cost, you allocate that cost to land, land improvements, buildings, and equipment, and then you depreciate all but the land.

1.1 What Goes into Basis

Examine the closing statement to identify expenditures that you should include in your basis. The following list gives you some of the items you usually would include:

  • Contract price
  • Personal property
  • Abstract (title search) fees
  • Escrow fees
  • Legal fees (for the title search, sales contract, and deed but not for the loan)
  • Real estate commissions (generally paid by the seller; include in your basis if paid by you, the
  • buyer)
  • Recording fees
  • Surveys
  • Transfer or stamp taxes
  • Title Examination
  • Amounts you paid on behalf of the seller, such as back taxes, back interest, recording fees,
  • mortgage fees, charges for improvements and repairs, and sales commissions
  • In addition to what appears on the closing statement, make a review of your credit card statements and checkbook
  • to identify other costs that apply to the purchase of this property.

1.2 Allocating Basis to Assets

You allocate basis to land, land improvements, buildings, and equipment based on fair market values at the time of purchase.

2. Loan Acquisition

When you buy rental property, tax law divides your loan costs into two categories:

  • Costs you incur to obtain the loan
  • Costs, like points, that decrease the mortgage interest rate

2.1 Costs to Obtain the Loan

You write off the costs of obtaining the mortgage over the life of the mortgage using the straight-line amortization method. Costs you include in this write-off include:

  • Mortgage commissions
  • Abstract fees
  • Mortgage recording fees
  • Mortgage stamp and other taxes
  • Credit report
  • Lender’s inspection report
  • Appraisal fee for the loan
  • Mortgage insurance application fee
  • Mortgage assumption fee

Example. You incur $8,000 in costs to obtain a 10-year mortgage loan. You deduct $800 a year.

Loan origination fees, brokers’ fees, maximum loan charges, and premium charges are not points. These are costs of obtaining the loan and, like the costs above, you amortize them on a straight-line basis over the life of the loan.

2.2 Loan Costs That You Treat Like Interest

Points. The term “points” is often confusing. In a financial sense, the point represents a prepayment that you make to obtain a discount on the loan interest rate. In general, the more points you pay, the lower the interest rate.

Essentially, the payment of points is the payment of interest in advance, and the tax law gives special treatment to your payment of points.

Since points are nothing more than prepayment of interest on your loan, tax law treats points as original issue discount (OID). The amount of your OID determines which method you may use to write off points paid on a rental property acquisition.

3. Operating Items

At closing, you might pay real property taxes, fire and property insurance premiums, and city and town taxes. Look at these expenses. See whether they apply to your current and future holding of the property. If so, you may deduct these costs as current-year operating expenses, assuming you place the property in service at closing.

Per IRS publication 551, “If you pay real estate taxes the seller owed on real property you bought, and the seller didn’t reimburse you, treat those taxes as part of your basis. You can’t deduct them as taxes. If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase.” 

You also want to look through your checkbook and credit card statements for other operating expenses and perhaps some start-up expenses.

Takeaways

The closing statement examination in this article is the perfect place to start your property on the track for maximum profits by getting the best tax benefits at inception.

When you are thinking about acquiring a rental property, make it a point to review this article so that you can get the most out of both your closing costs and your cost to buy the property.

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.