Category: Uncategorized

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Tax Consequences of a Short Sale of Your Principal Residence.

Howard Tax Prep LLC

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Uncategorized

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, General Information, notary, Self Employed, signing agent, Small Business, Tax Planning, Uncategorized

Businesses and Rentals Existing on Jan. 1 Must File Ownership information with FinCEN.

Howard Tax Prep LLC
Photo by Karolina Grabowska on Pexels.com

Here in our South Loop Chicago Tax Preparation office, we assist new entrepreneurs with creating their business entity. Recently we have received questions regarding the new beneficial owner report that FINCEN will be requiring. This article will address the FINCEN business owner reports, the information required, and the businesses that must comply.

Effective January 1, 2024, the Corporate Transparency Act (CTA) will go into effect. If you already have an active small business or a rental property in an LLC that you started before 2024, you must comply with the new federal report filing requirements by December 31st, 2024.

If, in 2024, you start a new business or add a rental to a new LLC, you will have 90 days to comply with the new Federal reports filing requirement. Under this requirement, you have to file two reports simultaneously with the Federal Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN):

  • A “beneficial owner” information report (BOI report).
  • A company applicant information report.

Please note that this new federal filing is separate from state and local filings, such as your annual report. From now on, determining whether this filing is required, and completing it within the deadline must become a routine part of forming most new corporations and LLCs.

This brand-new federal beneficial owner information report (BOI report) will be filed with the Financial Crimes Enforcement Network (FinCEN)—the Treasury Department’s financial intelligence unit. The filing requirement applies to most corporations, limited liability companies, limited partnerships and certain other business entities.

These BOI reports must disclose the identities and provide contact information for all of the entity’s “beneficial owners”: the humans who either (1) control 25 percent of the ownership interests in the entity or (2) exercise substantial control over the entity.

Your BOI report must contain all the following information for each beneficial owner”:[1]

  • Full legal name
  • Date of birth
  • Complete current residential street address
  • A unique identifying number from either a current U.S. passport, state or local ID document, or driver’s license or, if the individual has none of those, a foreign passport
  • An image of the document from which the unique identifying number was obtained

What happens if I don’t comply?

First, there are civil penalties of up to $500 for each day that a violation continues (capped at $10,000).
Second, there are also potential criminal penalties—imprisonment for up to two years for any person who willfully:

1.) provides, or attempts to provide, false or fraudulent beneficial ownership information and/or
2.) fails to report complete or updated beneficial ownership information to FinCEN.

The good news is that if make a mistake, you can avoid civil or criminal liability by submitting a corrected report within 90 days.

Who will have access to these reports?

FinCEN will create a new database called BOSS (Beneficial Ownership Secure System) for the BOI and will deploy the BOI to help law enforcement agencies prevent the use of anonymous shell companies for money laundering, tax evasion, terrorism, and other illegal purposes. It will not make the BOI reports publicly available.

Is my company a reporting company?

The CTA applies only to “reporting companies.” If the entity you’re forming is not a reporting company, you don’t have to worry about the CTA. Unfortunately, almost all small businesses are reporting companies.

Subject to some significant exemptions, the CTA applies to business entities formed by filing a document such as articles of incorporation or organization with a secretary of state office or similar official. This includes LLC’s corporations, limited partnerships in most states, and limited liability partnerships.

Breakdown of Business Entities & Their Reporting Requirements.

Sole proprietors. The CTA does not apply to sole proprietors because no document need be filed to legally establish a sole proprietorship (you simply start a business you own yourself).

Single-member LLCs. The CTA applies to individual business owners who form one-member LLCs to operate a business, even though that single-member LLC is taxed as a sole proprietorship (a “disregarded entity”). Reason: you must file a document (usually called articles of organization) with the secretary of state to form a one-member LLC, just as you must for multi-member LLCs.

Rental property. Many individuals form LLCs to own their rental properties. The newly formed 2024 LLCs trigger the CTA reporting requirements.

General partnerships. The CTA does not apply to general partnerships, except in a few states such as Delaware where general partnerships must make a state filing to come into existence. In states where the general partnership filing is optional and the partnership makes the filing, it must file the BOI.

Business trusts. Most business trusts are not reporting companies since no government filings are required to create them. But there are exceptions, such as Delaware statutory trusts.

Foreign corporations. The CTA also applies to foreign corporations, LLCs, and other entities that register to do business in the U.S. This is ordinarily done by filing a document with the state’s secretary of state.

Small businesses. Not all LLCs, corporations, or other business entities are subject to the CTA. Its focus is on smaller businesses not already heavily regulated by the federal government. FinCEN estimates that of the approximately 5,616,000 new companies formed each year, about 617,894 will be exempt. The broadest exemption is for “large operating companies.” These are businesses with:

  • more than 20 full-time employees (those who work more than 30 hours per week),
  • $5 million in domestic gross receipts or sales on their prior-year tax return, and a physical presence in the U.S
  • tax-exempt non-profits, including Section 501(c)(3) corporations, and Section 527 political organizations.

What happens if I change my business address or personal address?

You will have to file an updated BOI Report. The BOI updated filing will need to be renewed if any of the information on the BOI report changes. If there is a change in the information on the BOI report, an updated report must be filed within 30 days of the change.

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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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.