1st Chicago Accounting Firm Blog

Depreciating Business Property in Chicago

DereciationDepreciation deductions can be extremely valuable for a business. For example, in a recent court case, a federal judge ruled a company could begin taking its depreciation deductions for two buildings housing retail stores at a point prior to when they were “open for business.” The ruling allowed the company to show a loss for that tax year, which the company then used to offset income in earlier years and ultimately claim a total tax refund of over $2 million.*

Although this case involved a special 50% depreciation allowance made available by the Gulf Opportunity Zone Act of 2005, the fact remains that even regular depreciation deductions can significantly reduce a company’s tax bill.

General Rules

If business property has a useful life greater than one year, the owner generally is prohibited from deducting the full cost of the property in the year it is placed in service. Instead, a portion of the cost may be deducted each year as depreciation. The depreciation rules apply to most types of tangible property, with notable exceptions being inventory and unimproved land.

Different schedules specify the proper depreciation calculations for different types of property. The most widely used schedules are set forth under the Modified Accelerated Cost Recovery System (MACRS). MACRS assigns property to a recovery class based on the property’s “class life.”

For example, office equipment is assigned to the seven-year MACRS class. Assume a business purchased a piece of equipment for $20,000 and placed it in service in 2012. The property would be in its fourth year of service in 2015. Applicable IRS tables indicate that the appropriate deduction percentage is 12.49% of the cost, so the business could deduct $2,498 for that equipment in 2015.**

Placed in Service

As the above-mentioned court decision suggests, the date property is placed in service can be an important consideration. Though the IRS has specific definitions for different types of assets, generally, property is first placed in service on the date the taxpayer first places it “in a condition or state of readiness and availability for a specifically defined function.”

Because the definition is broad, taxpayers sometimes litigate how it should be applied to specific situations. In the decision mentioned above, the key issue was the “placed-in-service” date of two buildings that would eventually be used as building supply stores. The IRS had argued that the “placed-in-service” requirement meant that the buildings had to be open for business for retail customers. The court disagreed, however, holding that the buildings were placed in service when they were substantially complete and limited certificates of occupancy had been issued so that workers could enter the buildings to install necessary racks and shelving.

Related Provisions

Businesses may be able to benefit from the tax law’s Section 179 provisions to garner faster write-offs for some of their asset purchases. Currently, businesses will be allowed to expense up to $25,000 of qualifying property placed in service during the 2015 tax year, with that limit subject to further reduction once the amount placed in service exceeds $200,000.*** In addition, a current deduction may be available for certain limited amounts paid for property that the business expenses for financial accounting purposes. We can tell you more about these “de minimis safe harbor” regulations.

 

If you are tired of overpaying taxes, then call 312-887-1040 and ask for Brad.  Our tax and accounting services are provided to business owners throughout Chicago from our three conveniently located offices.

While we service all types of businesses, we provide additional tax and accounting services as well in restaurant accounting, dental practice accounting, law firm accounting and auto repair shop accounting.  All of these industries require additional expertise to minimize taxes legally, which is our primary focus.

 

* Stine, LLC v. USA (DC LA, 1/27/2015)

** Calculation assumes the half-year depreciation convention.

*** Congress kept the Section 179 limit at $500,000 for 2014 in late-year extender legislation.

5 Top Tax Errors on Rental Property

Residential Real EstateEntering the property rental market is a common way to increase your net worth in the long run as well as generate some passive income in the short run. If you are new to the landlord business though, you may fall prey to some common rental property income mistakes when you file your tax return. Of course, the best way to ensure that you don’t make any of the following mistakes is to have a professional prepare, or at least review, your return; however, knowing what the most common mistakes are is a good place to start.

  1. Not declaring rent when it is received – any rent received by a landlord must be declared in the year it is received. It is common, for example, to require a deposit as well as first and last month’s rent when leasing a property. Even though the last month’s rent isn’t actually due yet it must be declared in the year when you receive the funds.
  2. Security deposits count as income if not returned – if you collected a $2,000 security deposit and find that you need to keep $1,000 of it when the tenant moves out to repair damages and/or clean the property you need to declare the $1,000 as income. Of course, you may also have corresponding expenses if the funds are used to complete repairs.
  3. Expenses paid by a tenant are income to the landlord — if your tenant fixes something on the property, the money spent by the tenant is actually income to the landlord if the cost of the repairs is deducted off the rent. Again, you may also have a corresponding deduction for the cost of the repairs, meaning you need to declare both income and expenses.
  4. Property and furnishings are depreciated differently – property is often rented “furnished”. You may deduct the cost of the furnishings but make sure you calculate the deduction properly. Residential rental property is depreciated over 27 ½ years while furniture is depreciated over just five years.
  5. Failing to document – if it isn’t in writing is doesn’t count! Everything from your original lease agreement to the cost of replacing a lost key should be documented in writing. Not only does this ensure that you will get credit for all your allowable deductions but is also protects you in the event of an audit by the Internal Revenue Service.

By avoiding these five common rental income tax mistakes you can dramatically reduce the chances of an error on your tax return.

If you are tired of overpaying taxes, call 312-887-1040 and ask for Brad.

Chicago CPA Accounting office – 312-887-1040

Naperville CPA office – 708-428-4980

Orland Park CPA office – 708-428-4980

1st Chicago Accounting works with small business owners throughout Chicago with three convenient office locations.  For additional expertise, 1st Chicago Accounting has specialities in dental accounting, law firm accounting, auto repair shop accounting and restaurant accounting.

What is a Microloan?

In order to help small businesses succeed, the Small Business Administration created the Microloan Program. Under this program, certain non-profit childcare centers and small businesses can obtain small loans with short terms.

How it Works

If a business obtains one of these loans, the funds will come from certain intermediate lenders approved by the SBA. In most cases, an approved intermediate lender will be a community-based nonprofit organization with prior lending experience. The average microloan amount is around $13,000. However, businesses may be able to obtain microloans of up to $50,000.

MicroloanAfter obtaining a microloan, a small business can use the funds for various purposes, including the purchase of new equipment or machinery, fixture and furniture purposes or the purchase of supplies or retail inventory. The funds received through a microloan lending program cannot be used to purchase real estate or pay down another debt the business has incurred.

Loan Characteristics

Microloans may vary in regard to their fees, interest rates and length of term. The longest possible microloan term is six years, but many microloans come with a shorter term. Factors determining the loan term include the small business owner’s preferences, the lender’s requirements, the business owner’s plans for the loan’s proceeds and the amount of the loan. Interest rates on microloans range from 8 to 13 percent, and they vary based on the market and the lender’s cost.

Obtaining a Microloan

Businesses that wish to apply for a microloan can do so by contacting a local intermediary lender approved by SBA. Most states offer the microloan program in certain locations, and credit decisions are always made at the local level.

Each individual lender will impose its own credit and lending requirements on borrowers. However, most SBA-approved lenders will require the business owner to make a personal guarantee, and many lenders also require the pledge of collateral.

Every lender is required by SBA to provide technical assistance and business training to businesses that obtain microloans. Furthermore, SBA requires small businesses that borrow funds through the microloan program are often required to complete planning and training requirements before the lender can consider the loan application. Though the required training is another obstacle for businesses that need a loan, it can be a useful learning experience for companies looking to launch a new business or expand an existing one.

If you are seeking to lower your taxes and improve your operations, call 312-887-1040 and ask for Brad.

1st Chicago Accounting services businesses throughout Chicago with three convenient office locations, Downtown Chicago in West Loop area, Naperville and Orland Park.  We make accounting, payroll and back office systems operate more efficiently.  While we work with all types of businesses, we provide additional expertise in restaurant accounting, medical practice accounting, dental accounting and law firm accounting.

 

What is a PEO?

The acronym PEO stands for “professional employer organization.” These organizations help business reduce costs by allowing them to outsource the management of important company functions, such as workers’ compensation, payroll, employee benefits and human resources. By partnering with a PEO, a company can grow its bottom line and focus on its core tasks, such as marketing, production and customer service.

The Function of a PEO

PEOWhen a company begins working with a PEO, the PEO takes over many of the company’s most cumbersome human resource responsibilities. In addition to handling everyday human resource tasks, the PEO also assumes some of the employer’s legal responsibility for human resource issues, such as unemployment and healthcare, thus reducing the employer’s level of risk.

Once the employer establishes his relationship with the PEO, the PEO begins functioning as a second employer for its clients employees. Instead of coming to their legal employer with human resource concerns, employees will go to the PEO. The PEO manages all of the company’s human resource dealings on a daily basis, and the company no longer needs to worry about the accuracy of its payroll or whether its healthcare plan complies with federal regulations. Many PEOs even offer a comprehensive benefits package for employees that allows the PEO’s clients to become more competitive within the industry.

Benefits of a PEO

The business industry is always evolving. Congress enacts new laws, such as the recent change to healthcare regulation, and businesses must alter their procedures to comply with the new guidelines. When a company is small, keeping up with the constant changes can be nearly impossible. Instead of focusing on their most important tasks, employees are forced to spread themselves too thin. Furthermore, because employees are inexperienced in these areas, tasks are not completed as accurately and efficiently as they should be.

When a company hires a PEO, most of these problems disappear. Instead of relying on its own overworked and under-prepared employees to handle unemployment insurance claims, payroll tax compliance, workers’ compensation claims and issues with employee healthcare, companies can rely on a PEO’s experts to take care of all of these obligations. Not only are these facets of the company’s operations dealt with more effectively, but employees also find themselves with more time to concentrate on activities that produce revenue for the company. Furthermore, all human resource tasks are completed with efficiency, and the company’s bottom line improves.

Top 5 Tax Mistakes Made by Chicago Restaurants

RestaurantKeeping a restaurant up and running and profitable is no easy task. It is estimated that one in five restaurants will close within two years time, so it’s no wonder that tax issues can be pushed to the side when you’re working hard just to keep the doors open. Unfortunately, these five top tax mistakes can cause even more damage if not correctly quickly.

Tip Reporting

Tips may keep your wait staff happy, but the IRS still wants their cut. There are specific rules and requirements that both your employees and you have to follow. For example, the total tip income reported for a pay period must equal at least 8% of sales. In addition, it is your responsibility to collect and report social security, Medicare, and income tax on tips.

Structuring Deposits

Because many restaurants deal in cash, it can be tempting to deposit less than $10k at a time to avoid having to fill out a Currency Transaction Report, (CTR). Too often, business owners feel that filing a CTR will raise a red flag, but the opposite is actually true.

If you structure your deposits, so they are less than $10K, you will quickly gain the attention of the IRS and possibly other government agencies. In addition, avoiding the CTR is a felony.

Employee Classification

It can be tempting to classify your employees as independent contractors to avoid taxes, but this will catch up to you. A business owner can’t make this type of classification on their own. The IRS rule comes down to whether or not your employee is under your control and direction. If so, they are an employee and not an independent contractor. To classify them incorrectly can lead to heavy penalties.

Not Paying Employment Taxes

If  you’re having trouble paying vendors or your lease payments, it may seem like a good option to put off paying employment taxes. This is always a mistake. You will be liable for IRS penalties not only as a business but also as an individual. This debt cannot be discharged in a bankruptcy.

Unorganized Record Keeping

This is one area where the pain comes from losing possible deductions instead of being penalized by the government. By keeping good records, you can take full advantage of business tax deductions. This can be the difference between being in the black or falling back into the red.

If you are tired of overpaying taxes and would like to avoid tax notices, then call 312-887-1040 and ask for Brad.  Our initial consultation is free for restaurant owners.

 

1st Chicago Accounting makes tax compliance and financial reporting less stressful for hospitality businesses.  Our firm specializes in restaurant accounting for family owned restaurants, franchise restaurants, brew pubs, catering, and bars.

 

Tax Credits Needed for Chicago Businesses

Section 179 allows a business to deduct the total cost for qualified leased, financed, or purchased equipment in the year it was purchased instead of depreciating the cost over the life of the equipment. Typically, however, Congress waits until after the first of the year to renew this section which can hurt small business owners and manufacturers as well as farmers, dentists, and medical providers.

Tax CreditsVery often, Congress doesn’t get around to renewing tax breaks, such as Section 179, until well after the end of the year. Then they make it retroactive. This creates all sorts of issues for businesses who attempt to plan purchases with tax breaks in mind. Often, small businesses will miss out on the tax altogether.

While tax breaks such as Section 179 are typically renewed each year, it isn’t a given. That means businesses as well as farmers and even those in the medical profession won’t know if they are allowed to deduct $25,000 or $500,000. The final approved amount depends on whether or not the larger deductions are renewed. If not, the limit reverts to the original $25,000.

This can make a buying decisions difficult. For example if a farmer needs to buy a new combine, the farmer is looking at an investment of up to half a million dollars. If Section 179 isn’t renewed at the higher levels, this investment may need to be reconsidered. The same goes for medical or manufacturing equipment.

Still, for a small business, even the limit of $25,000 can make a tremendous difference. As off-the-shelf software also qualifies for this deduction, a small business could update their software to enhance efficiency therefore increasing their bottom line.

Tax planning is a critical component of a successful company. That’s why it is so important for Congress to act quickly and in a timely manner, so small businesses can plan for the next year while they still have the time to implement smart decisions. Small businesses are the backbone of this county and do drive the economy, and Congress shouldn’t forget that.

If you would like to lower your tax bill legally, call Brad at 312-887-1040.

1st Chicago Accounting services small businesses and individuals throughout Chicago with three convenient locations, Downtown Chicago, Naperville and Orland Park.  Our founder, Brad Filmanowicz, is a CPA and has built the practice from scratch after working for Sara Lee.  While we service businesses across nearly all industries, we have additional expertise in dental practice accounting, medical practice accounting, and restaurant accounting.

Tasks Chicago Entrepreneurs Should Outsource

OutsourceAs a business owner, it can be difficult to delegate important tasks. When you complete them yourself, you know they will be done correctly and in a timely manner. Even so, if you want your business to grow, and keep expenses low, there are three tasks that you should consider outsourcing.

Website and Graphic Design

By outsourcing your website and graphic design, you will have access to an expert in the field, on demand. The person or company you outsource to will have the equipment, experience, training and knowledge to provide you with design concepts that would otherwise be beyond your reach.

You will also receive a professional product which is doubly important as your website is your online business card. This is one area that you want and need a professional’s assistance.

Payroll

As your company grows, the complexities of your payroll grow as well. In addition to saving time and money, payroll is one area of your business that the government takes great interest in. Payroll specialists make it their job to stay current in government regulations which means they will keep you and your company compliant.

In addition, payroll companies can provide you and your employees with an added layer of security. This can reduce the risk of embezzlement, identity theft, and interference, by an employee, with company records for financial gain.

Accounting and Tax Returns

Much like payroll, your accounting and tax returns are not an area of your business where you can afford errors. Without specialized tax knowledge, you run the risk of missing deductions leading to paying higher taxes than necessary or to making errors that result in penalties.

One of the main benefits of outsourcing any task is that while you may pay more per hour for the task to be completed, you will save much more money, in the long run, than if you hired a full-time employee when you take into consideration salary, benefits, taxes, health insurance, as well as the overhead to provide space for the employee to work. In the end, outsourcing can be a cost efficient way to expand your business.

If you would like to outsource payroll and/or outsource accounting, call 708-428-4980 and ask for Brad.

 

1st Chicago Accounting is a Chicago accounting and payroll service provider.  We have three convenient office locations to service businesses throughout Chicago.  Our offices are Downtown Chicago, Naperville and Orland Park.

Section 179 Tax Deduction for Chicago Businesses

Section 179 allows a business to deduct the total cost for qualified leased, financed, or purchased equipment in the year it was purchased instead of depreciating the cost over the life of the equipment. Typically, however, Congress waits until after the first of the year to renew this section which can hurt small business owners and manufacturers as well as farmers, dentists, and medical providers.

Section 179 2Very often, Congress doesn’t get around to renewing tax breaks, such as Section 179, until well after the end of the year. Then they make it retroactive. This creates all sorts of issues for businesses who attempt to plan purchases with tax breaks in mind. Often, small businesses will miss out on the tax altogether.

While tax breaks such as Section 179 are typically renewed each year, it isn’t a given. That means businesses as well as farmers and even those in the medical profession won’t know if they are allowed to deduct $25,000 or $500,000. The final approved amount depends on whether or not the larger deductions are renewed. If not, the limit reverts to the original $25,000.

This can make a buying decisions difficult. For example if a farmer needs to buy a new combine, the farmer is looking at an investment of up to half a million dollars. If Section 179 isn’t renewed at the higher levels, this investment may need to be reconsidered. The same goes for medical or manufacturing equipment.

Still, for a small business, even the limit of $25,000 can make a tremendous difference. As off-the-shelf software also qualifies for this deduction, a small business could update their software to enhance efficiency therefore increasing their bottom line.

Tax planning is a critical component of a successful company. That’s why it is so important for Congress to act quickly and in a timely manner, so small businesses can plan for the next year while they still have the time to implement smart decisions. Small businesses are the backbone of this county and do drive the economy, and Congress shouldn’t forget that.

If you would like to minimize your taxes legally, then call 708-428-4980 and ask for Brad.

1st Chicago Accounting is a leading Chicago Accounting firm for business owners that hate overpaying taxes.

Sliding Door Injury Results in $21.5M Trial Verdict

Holland AmericanA federal jury trial awarded $21.5 million in damages to a Springfield, Illinois man who was injured by an automatic sliding-glass door on a Holland America Line cruise ship dating back to 2011.

The personal injury damages awarded by the jury were $5M, which are tax free.  The punitive damages were $16.5M which means a windfall for the IRS.  That’s right, the entire $16.5M is taxable and the attorney fee, which is normally contingent for personal injury cases (30-40% contingent fee), will be challenging to deduct.  That means the IRS will get the largest share of the $16.5M and the attorney will get a large cut as well.

Shockingly, it pays to evaluate the tax implications into your legal decisions when the punitive awards could create a huge tax bill.

As you might suspect, Holland America Cruise has appealed the verdict so a settlement for an amount less than $21.5M, but a higher award for personal injuries (higher than $5M) may be a win win solution.

1st Chicago Accounting is an accounting firm servicing businesses and individuals throughout Chicago with three convenient office locations, Downtown Chicago, Naperville and Orland Park.  Call 708-428-4980 and ask for Brad to discuss your situation.