Seven Reasons To File Your Tax Return ASAP

Although the deadline for filing tax returns isn’t until March 15 for corporations and April 15 for individuals, there are plenty of good reasons why you should get your tax information to your accountant sooner rather than later.

By now you should have received all of the tax documents you need to file your 2015 tax return, including your W-2 (wages from an employer), 1098 (mortgage interest and other items), and 1099 (investment income from dividends, interest, and capital gains). Here are seven great reasons to round up your tax information and file your taxes as soon as possible:

1. Lessen the sting of unpleasant surprises: Finding out that your tax bill is larger than you expected (or your refund is smaller than expected) is never a good thing. But the sooner you learn about it, the less painful it will be. This is because you will have more time to round up the necessary funds.
2. Give your accountant more time to look for deductions: The earlier you get your tax documents to your accountant, the more time he or she has to spend time thinking about ways to minimize your tax bill. At Eilts & Associates, we compare your current year’s information with previous years’ returns to look for deductions or credits you may have missed and try to identify any strategies that can lower this year’s return. For example, the deadline for making IRA contributions that are deductible from 2015 income is April 15, 2016. This can be a great last-minute strategy for lowering your tax bill while saving for retirement at the same time.
3. Leave time for follow-up questions: When taxpayers give information to their accountant, it often will be missing a few important items. Getting the initial information to your accountant ahead of the deadline gives the accountant time to round up any missing information or ask follow-up questions that could lead to valuable tax savings.
4. Get your refund sooner: As an accountant, nothing pains me more than seeing my clients give out free loans to the federal government. But this is essentially what happens if you are due to get a refund and you wait until the last possible moment to file your return. This is especially true if you use the six-month extension and wait all the way until October to file. I’m sure you can think of much better uses for that money than letting it sit in the U.S. Treasury Department’s coffers.
5. Keep your money as long as possible: Many people who anticipate owing money on their tax return will wait until the deadline to file because they want to hang on to that money for as long as possible. While this is smart in theory, it doesn’t make sense in practice. By post-dating your check to April 15 or setting up the electronic withdrawal for April 15, we can make sure you keep your money in your bank account until the last day possible, regardless of when you actually file your return.
6. Protect yourself from tax-refund fraud: Tax-refund fraud is when someone files a fraudulent tax return using your Social Security number and date of birth and then has the refund diverted to the criminal’s bank account. Filing your return as soon as possible is one of the best defenses against tax-refund fraud because it increases the chances that the IRS will already have your actual return on file when the second, fraudulent return comes in. Learn more about protecting yourself from tax-refund fraud.
7. Don’t hide behind the extension: Every taxpayer is allowed to apply for an automatic six-month extension for filing his or her tax return. Tax return is the key word in that sentence because the extension only applies to getting your paperwork to the IRS, not your money. You still owe the full amount on April 15, and you will be charged interest and possibly penalties for any amount unpaid after that date. At Eilts & Associates, we want our clients to send us at least their W-2 as soon as possible, even if they plan on using the extension. This allows us to estimate whether they will owe anything on April 15.

Even if you are still waiting to receive your 1099-DIV form for mutual fund distributions, you can still send us everything else you have. That allows us to get started preparing your return, and when you receive your 1099-DIV by the end of February at the latest, your return will be ready to be filed.

If you have any questions about filing your tax return, please contact us at 773.525.6171 or bart@eiltscpa.com.  We look forward to working with you this spring!

File Your Return Early to Beat the Tax Crooks

There have always been many good reasons to file your taxes well before the April 15 deadline. But with identify theft becoming an increasingly serious problem for taxpayers, filing early has become an important strategy for protecting yourself from tax-refund fraud.

The Government Accountability Office estimates that the IRS paid out $11 billion in refunds in 2013 and 2014 to criminals who filed returns under a stolen identity. This amount is in addition to the estimated $24.2 billion of fraudulent refunds that the IRS was able to prevent in 2013 alone. (The amount of fraud prevented in 2014 was not available.) From 2011 to 2014, the IRS estimates that 19 million fraudulent returns were filed.

While these numbers are scary, protecting yourself can be as simple as beating the bad guys to the punch. One of the best ways to reduce the risk of tax-refund fraud is to file your return before a criminal has a chance to make fraudulent claim.

How Tax-Refund Fraud Works

Tax-refund fraud is becoming increasingly common because it is surprisingly easy. All a criminal needs to file a fraudulent claim and divert the refund to the criminal’s account is your name, date of birth, and Social Security number. Given the growing number of data breaches, including high-profile incidents at Target, Home Depot, Sony, and even the IRS itself, countless Americans have had their personal information fall in the hands of criminals.

The IRS is required by law to process refunds within 30 days of receiving a tax return. Thus, if a criminal files a fraudulent return on February 15, the IRS—assuming it doesn’t flag the return as being fraudulent—has to pay out the refund by mid-March. There is a good chance that the fraud will go unnoticed until the actual taxpayer files his or her return, resulting in two returns being filed for the same Social Security number. Although taxpayers are able to recover their refunds once the fraud is detected, doing so requires a lot of headache and a lot of paperwork.

Filing your return as soon as possible is one of the best defenses against tax-refund fraud because it increases the chances that the IRS will already have your actual return on file when the second, fraudulent return comes in.

Getting a Head Start on Filing

Companies are required to mail W-2, 1098, 1099, and other important documents to taxpayers in January. Although you can’t file your return until you receive these documents, there is plenty that you can do in the meantime so that you are ready to file once those documents arrive.

Even before the end of the year, you can begin rounding up information related to charitable donations, rental property, property taxes, and medical and educational expenses. If you work from home or have a freelance business, you can start organizing information for your home-office expenses and other business expenses. In addition, you can schedule a time in January or February to meet with your tax preparer.

Other Benefits of Filing Early

Besides protecting yourself from identity theft, there are several other important reasons to file your taxes well before the April 15 deadline:

• Lessen the sting of unpleasant surprises: Finding out that your tax bill is larger than you expected (or your refund is smaller than expected) is never a good thing. But the sooner you learn about it, the less painful it will be. This is because you will have more time to round up the necessary funds.
• Give your accountant more time to look for deductions: The earlier you get your tax documents to your accountant, the more time he or she has to spend time thinking about ways to minimize your tax bill. At Eilts & Associates, we compare your current year’s information with previous years’ returns to look for deductions or credits you may have missed and try to identify any strategies that can lower this year’s return. For example, the deadline for making IRA contributions that are deductible from 2015 income is April 15, 2016. This can be a great last-minute strategy for lowering your tax bill while saving for retirement at the same time.
• Leave time for follow-up questions: When taxpayers give information to their accountant, it often will be missing a few important items. Getting the initial information to your accountant ahead of the deadline gives the accountant time to round up any missing information or ask follow-up questions that could lead to valuable tax savings.
• Get your refund sooner: If you are due a refund, waiting until the last possible moment to file your return is like giving a tax-free loan to the federal government. This is especially true if you use the six-month extension and wait until October to file. You can probably think of much better uses for that money than letting it sit in the U.S. Treasury Department’s coffers.

Even if you anticipate owing money on your tax return this year, it still makes sense to file your return early. By post-dating your check to April 15 or setting up the electronic withdrawal for April 15, we can make sure you keep your money in your bank account until the last day possible, regardless of when you actually file the return.

As you can see, there are a lot of reasons—including safety, accuracy, convenience, and peace of mind—to file your tax return well before April 15 this year. While identity theft is a major problem, proactive taxpayers can help protect themselves from this growing threat.

If you have any questions about filing your tax return, please contact us at 773.525.6171 or bart@eiltscpa.com. We look forward to working with you in 2016!

Gift and Estate Taxes: Knowing What Needs to be Reported

The gift tax and estate tax only apply to gifts and estates greater than $5.43 million (or $10.86 million per couple). But even if you’re among the vast majority of Americans whose net worth is well below these amounts, it is still important to understand the basics of these tax systems. In this article, we explain how the gift tax and estate tax work and answer some of the most common questions our clients have about whether gifts need to be reported to the IRS.

Gift Tax: Understanding the Basics

The first thing to understand is that the donor, not the recipient, of the gift or inheritance is responsible for reporting it. (Gifts are transfers made while the donor is still alive, and inheritances are transfers made after the donor has died.) This is true regardless of the size of the gift or inheritance. For that reason, whenever you receive a gift or inheritance, you do not need to take any action as far as the IRS is concerned.

With that in mind, it is also important to understand that only gifts larger than the $14,000 annual exclusion need to be reported by the donor. The annual exclusion is Congress’s way of allowing people to give up to a certain amount ($14,000 for 2015) to loved ones and other recipients each year without triggering any gift tax implications.

The annual exclusion applies to an unlimited number of recipients, which means you can gift up to $14,000 in 2015 to as many people as you want without any of those gifts becoming a reportable gift. For example, if Scrooge McDuck gives $14,000 each to his great-nephews Huey, Dewey, and Louie in 2015, none of the three gifts are reportable. However, if Scrooge gives $14,000 to Huey and $14,000 to Dewey, but gives $20,000 to Louie, Scrooge would have a reportable gift of $6,000 for Louie’s gift ($20,000 gift – $14,000 exclusion).

A reportable gift, however, does not become a taxable gift unless the donor has already used up all of his or her $5.43 million gift and estate tax exemption. In other words, a reportable gift simply reduces the amount of the gift and estate tax exemption that is available for use. We will discuss the $5.43 million exemption in more detail later in the article.

It’s also important to note that spouses can combine their annual exclusion amount. Thus, Donald Duck and Daisy Duck can give up to $28,000 to an unlimited number of recipients in 2015 without incurring a reportable gift.

Some gifts, however, do not count as a reportable gift regardless of the amount. The following types of gifts are never reportable and never reduce the amount of the gift and estate tax exemption available:

1. Payments that are made on behalf of a loved one for healthcare or education expenses, but only if these payments are made directly to the hospital, school, etc.
2. Gifts to a spouse
3. Gifts to charities or political organizations

If a gift is a reportable gift, the donor must file a gift tax return (IRS Form 709). The fact that a gift is reportable, however, does not mean that the donor automatically owes taxes on the gift. This is because there is an exemption that will apply to the vast majority of gifts.

Understanding the Gift Tax and Estate Tax Exemption

Every donor has an aggregate lifetime exemption that applies to all taxable gifts before any out-of-pocket tax is actually owed. In 2015, the exemption amount is $5.43 million, and the amount is adjusted annually for inflation.

Importantly, that $5.43 million exemption applies cumulatively to gifts and estates. This means that any amount of the exemption that applies to gifts made during a donor’s lifetime will reduce the amount that can be used for estate tax purposes upon the donor’s death. For example, if Scrooge gives away $4.43 million worth of taxable gifts during his lifetime, only $1 million of his estate will be exempted from estate tax when he dies ($5.43 million exemption – $4.43 million of exemption used for lifetime gifts = $1 million exemption remaining for estate taxes).

Spouses can combine their aggregate lifetime exemptions, so spouses may give away up to $10.86 million without owing any gift tax or estate tax.

Inheriting an Asset? Step Up Your Basis

When you inherit property or other assets, the dearly departed isn’t the only one giving you a gift. You also receive a potentially valuable gift from Congress: a step-up in basis.

A step-up in basis is a tax benefit that helps reduce the amount of capital gains taxes you may owe when you sell property that you inherited. A step-up in basis means that the value of the property for the purposes of determining your capital gains tax becomes the value of the property at the time of inheritance, not the value at which the giver initially purchased the property.

For example, suppose Donald Duck inherits his Uncle Scrooge’s house, a house that Scrooge originally purchased for $150,000 in 1995. In the 20 years since Scrooge purchased the house, it has appreciated from $150,000 to $400,000 at the time of Scrooge’s death. Donald’s basis on the house would get “stepped up” to the $400,000 it is worth at the time he inherits it, not the $150,000 that Scrooge paid for the house. Clearly, a step-up in basis can result in significant savings, especially for assets that have appreciated significantly from the time they were first purchased. The long-term capital gains tax rate is 15% for most people and 20% for high-income taxpayers like Scrooge.

The step-up in basis applies to all types of assets, including stock, a house, jewelry, or a piece of art. For houses and other assets that do not have an easily identifiable market value, it may be helpful to get an appraisal so that you can document the value and know your basis. And for those assets that have a more easily identifiable value (such as stock), it is still important to record the market value on the day that you inherit the asset, so you know what your basis is.

Hopefully, this article helps you understand the basic structure of how the gift tax and estate tax work. If you have any questions about what giving or receiving a gift or inheritance means for your specific tax situation, please do not hesitate to contact us at 773.525.6171 or bart@eiltscpa.com.

Top 10 Tips for Organizing Your Tax Information

When it comes to getting ready for tax season, organization is more than half the battle. By taking a few easy steps in now, you can make your life much simpler come April.

1)    Put tax documents in a folder – Get a folder and write “Taxes – 2014” on it. Whenever an important tax document (e.g., 1099, 1098, W-2, giving statement from a charity) shows up in the mail, put it in this folder. This way, when it is time to compile your tax return, all the necessary documents will be in one place.  I recommend putting the folder in a convenient spot, preferably close to wherever you keep your mail. Don’t leave these documents sitting around on the kitchen counter or computer desk where they can accidently get mixed in with other papers.

2)    Check the odometer – In case you didn’t write down your mileage on December 31 (like I recommended in our article on the business use of automobiles), write down your current mileage and date. This will allow us to estimate what the mileage was at year-end. An even better solution is to have the odometer documented by an oil-change or repair shop. This third-party documentation will be very helpful in case of an audit. If you have been keeping an actual mileage log throughout the year, add it up and put it in your taxes folder.

3)    Track your donations – For donations of less than $250, you may not receive an acknowledgement form from the charitable organization. If this is the case, look through your records and compile a list of your donations. Don’t forget to include non-cash donations to organizations such as Goodwill and The Salvation Army. If you made a charitable donation through your employer, provide us the final pay stub of 2014 as evidence of the amount; this information is usually not on the W-2.

4)    Use the tax organizer – Eilts & Associates clients should have received a tax organizer from us in the mail during the past few weeks. In addition to listing the documents needed for your tax return, the tax organizer also includes a list of questions that will help us identify all the tax deductions you are eligible for. Please let us know if you need another copy of the organizer.

5)    Remember property taxes – If you are a homeowner and your property taxes are not paid from an escrow account, find your total property taxes for the year by adding the amounts from both installments. Remember that you need to provide us with your house’s PIN to take advantage of the Illinois property tax credit.

6)    Cash in on new kids – If you welcomed a new child to the family in 2014, first of all—congratulations! Secondly, remember that the new child arrived with some built-in tax benefits. Provide us the child’s full name, Social Security Number, and date of birth, so you can take advantage of these tax benefits.

7)    Track gains and losses – If you sold stocks, bonds, or other investments during 2014, the broker or investment company will provide documentation with the sale proceeds. But these documents might not include the cost basis. If this is the case, look through your records to find the amount you paid for the investment, so we can determine the gain or loss.

8)    Book those education expenses – There are several potentially valuable tax breaks for college tuition and other postsecondary education expenses. Students or their parents may be able to claim one of two federal income tax credits or a deduction. There also is an Illinois state income tax credit of up to $500 for expenses relating to kindergarten through 12th grade. For more information, check out our article on education tax breaks.

9)    Prepare for the use tax – The State of Illinois moved the reporting of the use tax to the IL-1040 in an effort to increase reporting of this little-known tax. Let us know if you plan to calculate the actual amount for this tax, use an estimate, or report $0 use-tax liability. If you plan on using the actual amount, provide us a list of purchases you made in 2014 that were not subject to state sales tax. For more information about the use tax, see our article on the use-tax reporting requirements.

10) Put tax documents in a folder – I know this tip was already on this list, but it’s so important that it deserves to be on the list twice. (Plus, a Top 10 list sounds a lot better than a Top 9 list.)

I hope this helps you get organized for tax season. If you have any questions, please contact Bart Eilts at 773.525.6171 or bart@eiltscpa.com.

Simple Steps for Protecting Yourself from Identity Theft

You don’t have to follow the news very closely to know that identity theft and cyberattacks are becoming bigger and bigger threats each year. Remember what happened to Target? In late 2013, hackers stole credit card data from more than 40 million of its shoppers. Target is hardly alone. Home Depot, Apple, Wal-Mart, Neiman Marcus, and, of course, Sony, are all household names that have been hit by cyberattacks.

These massive breaches have demonstrated that criminals are employing increasingly sophisticated methods, which is why you need to be as vigilant as possible in protecting your identity. There are several simple steps that we recommend our clients take to protect themselves from identity theft and other cyberattacks.

What steps can you take to protect to your identity?

Review your credit report: One way to protect yourself from identity theft is to mitigate the damage by spotting any potential breaches as soon as possible. That is why it is a good idea to request a credit report twice a year. Reviewing your credit report allows to you see if there has been any credit card or loan activity by someone pretending to be you. The benefits of reviewing your credit report extend beyond protecting your identity. It also gives you a chance to identify and contest any inaccuracies. If you let potential errors fester on your report, they can drastically affect your ability to qualify for a loan or receive the most competitive interest rates.

You don’t even have to pay for a credit report from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion). Each agency will provide you with one free credit report a year. Call your bank, too. More and more banks are offering customers free credit reports.

Use our ShareFile to securely send documents electronically: Email services like Gmail and Yahoo! are not encrypted, which means the information sent over these systems is vulnerable to being intercepted by hackers. That is why you don’t want to send tax documents, which contain your Social Security number, account numbers, and all sorts of other sensitive information, via your regular email account.

When you send tax documents to our office this tax year, use our new ShareFile system, which encrypts the data and adds important layers of security. If you have questions about using this service, which is free to our clients, please contact us (773.525.6171; bart@eiltscpa.com) and we will walk you through the process.

Click here to upload files securely to Eilts & Associates using ShareFile

Use strong passwords: The general rule to remember for passwords is that the longer it is, the securer it will be. Try to always include numbers and special characters, and avoid using the names of places, friends, or pets. The more nonsensical (i.e., not actual words) your password is, the less likely that a hacker’s algorithm will be able to guess it.

Monitor your email accounts: Thieves can break into your email account and subsequently send messages to banks and other financial institutions requesting money transfers. You should regularly check your sent and trash folders for any messages that you don’t recognize sending. When you are using a public computer, sign out of your email account at the end of each session.

Set up a passcode on your smartphone: Your phone holds a trove of valuable information that an identity thief would like to access. This is why you should set up a pin or thumbprint touch ID so that there’s an added layer of protection between strangers and your phone.

Safely discard of old documents: Even though cybercriminals are using increasingly sophisticated online methods to steal information, good old-fashioned dumpster diving is still a commonly used tactic by identity thieves. It is important to shred any documents that contain sensitive information before throwing them away.

Beware of IRS phone scams: As we reported in a blog post last fall, there has been a recent increase in attempted phone scams involving callers pretending to be IRS agents. Do not ever give any personal information to a caller purporting to be from the IRS. The IRS will never call or email you; if the IRS wants to contact you about a tax matter, you will receive a letter in the mail.

How long should you hang on to old documents?

You should hang on to W-2 forms, account statements, receipts, and other documentation that you used to file your taxes for three years. If the Internal Revenue Service believes that you have made good-faith errors on your tax return, the IRS has up to three years to challenge your filing.

Despite this three-year statute of limitations, it is smart to keep certain important documents indefinitely. Tax returns, HUD closing statements from the purchase of a house, and other home improvement records provide valuable historical information and should be kept indefinitely (either as a hard copy or a scanned copy).

What is Shredder Day and why should you go?

Eilts & Associates is hosting our first-ever Shredder Day on Sunday, February 15 from 11:00 a.m. to 3:00 p.m. at our office (3711 N. Ravenswood). Shredder Day is an opportunity for you to bring your financial documents from 2010 and older for free and secure shredding. Our professional shredder service will take everything off your hands so that sensitive information doesn’t end up in the wrong hands.

If you decide to join us at Shredder Day, we encourage you to bring in your 2014 tax information so that we can get started on this year’s return. By January 31, you should have received most of the documents you’ll need to file your taxes: W-2, 1098, 1099, and confirmations of charitable donations. Don’t worry if you are still missing an item or two by February 15; we can get started with what you do have.

Please do not hesitate to contact us (773.525.6171; bart@eiltscpa.com) with any questions about your tax return or the best practices for protecting your identity. We hope to see you on Shredder Day.

Getting Ready to File Business Taxes

A new year is here, and that means it’s time to start implementing your business strategy for 2015 … and thinking about taxes for 2014. The Internal Revenue Service requires that corporate tax returns be filed by March 15. While it might seem like you still have plenty of time to get organized, you can bet that March is going to creep up quickly … especially when you’re busy running your business.

At Eilts & Associates, our goal is to help you minimize your tax bill by capturing all of the deductions and credits you are eligible for. The earlier we get your information, the more time we can spend identifying ways to save you money. That is why we encourage our corporate clients to provide us with all of the information we need to file your tax return by February 15.

What documents does my business need to provide Eilts & Associates?

There are four primary documents, forms, or statements that we need to file your company’s tax return:

• Bank statements from December 31, 2014
• Payroll reports and W-2 forms issued by your company in 2014
• Credit card and loan statements from December 31, 2014
• Backup of year-end QuickBooks or whatever accounting system your company uses

Once you have compiled these documents, send them to Eilts & Associates online through our secure ShareFile system, which encrypts the sensitive data. You can also bring hard copies of the documents to us.

What goes into “closing the books?”

Closing the books, which is something your business should be doing each month, is one of the most critical steps that goes into preparing to file your taxes. Think of closing the books as your opportunity to confirm that all of the information is present and accurate. Before sending us your tax information, it’s particularly important to close the books for year-end.

While the process can vary slightly depending on your business and industry, there are certain things that every company should be doing when closing its books:

1. Reconcile bank statements and credit card statements: Make sure that all of the transactions going in and out of your business’s checking, savings, and credit accounts were properly recorded. Make sure your zeros and decimals are in the right spots. If you have any outstanding items, make sure they are properly recorded.

When you’re doing this, don’t just go through the motions. Take the time to closely review the statements, investigating items that might seem odd. Here are some examples of things that might merit extra investigation:

• Deposits-in-transit older than three days: These are deposits that are recorded on the books but haven’t cleared the bank yet. It’s important to remember that a deposit won’t normally stay in transit for more than three days. If you see a deposit-in-transit from the 15^th of the month when you’re doing a month-end reconciliation, you will want to investigate that.
• Checks that haven’t cleared: If you sent a vendor a check several weeks ago and it still hasn’t been deposited, you may want to check with the vendor to see if the check got lost.
• Unpaid invoices: If there is an overdue invoice from a client that normally pays very promptly, you will want to look into this. It could be a sign that the client didn’t see the invoice or the check didn’t get delivered properly. Collecting on accounts receivable is the lifeblood of your business, so you’ll want to stay on top of this.
• Credit card expenses that show up twice: Errors like these might cause you to overstate your business’s expenses, or it might mean that you were mistakenly overcharged by the vendor.

You don’t want to miss out on expenses and tax deductions. Likewise, you don’t want revenue to be over-reported. If you’d like to learn more about reconciling your business’s bank statements, there are lots of online tutorials (such as this article from QuickBooks), or you can set up a time for us to walk you through it.

2. Verify that payroll is recorded properly: If your business has employees, you will want to make sure that you are properly recording the wages, withholding, payroll taxes, and other line items. You will want to make sure that what you have recorded on your payroll report matches up with what gets reported to the government.

3. Assign accrued revenue and expenses in the correct month: Make sure that all income and related expenses get entered into the correct month. While making sure these items are assigned to the right year is what the IRS primarily cares about, assigning them to the right month is important to you as a business owner. This allows you to analyze your performance down the road and have an accurate picture of what your performance actually looked like that month. When the information isn’t recorded correctly, it causes you to make projections and other decisions based on inaccurate information.

4. Review your income statement and balance sheet: Again, looking for odd items is the name of the game. For example, in reviewing income statements from past months, you might notice that your rent is usually $2,000 but it jumped to $4,000 one month. That would be an immediate red flag, indicating that you may have accidentally paid something twice or recorded the event in the wrong month.

5. Identify who needs a 1099-MISC Form: The IRS requires businesses to provide a 1099-MISC form to any vendor or contractor that you paid at least $600 to during the year. Make sure you get those delivered by January 31. If you need help deciding whether someone is a contractor or an employee, check out our article “Employee or Contractor? 10 Ways to Make This Important Distinction.”

The tips above apply to any type of business. But depending on the nature of your industry or business model, there may be additional steps to take when closing your books:

• Capital-intensive businesses need to accurately record depreciation for equipment and machinery.
• Retail businesses should adjust inventory to align with the actual count on December 31; your point-of-sale system might not have a 100% accurate count of the inventory level.
• Companies with retirement plans should record accrued pension expenses and other plan expenses.
• Sales tax should be properly calculated and recorded.

What are the benefits of closing your business’s books each month and at the end of the year?

When you’re busy with growing and managing your business, closing the books might not seem like a valuable use of your time. But carving out some time each month to do this delivers some very important benefits.

Having an accurate picture of your financial results allows you to do a better job of planning for and optimizing your business’s financial performance. Also, when you go to apply for a loan, banks will require you to have properly closed books before considering your application.

From a tax perspective, being diligent about closing your books each month—and especially at the end of the year—saves you money in a few different ways. First of all, it helps you ensure that you don’t over-report income or underreport expenses. Secondly, sending us “clean” (i.e., organized and accurately recorded) information allows us to file your tax return more efficiently, which results in a lower bill for you.

As you begin gathering your tax documents ahead of the March 15 deadline (and the February 15 preferred deadline for submitting your information to us), please do not hesitate to contact us (773.525.6171; bart@eiltscpa.com) with any questions. We are committed to making this process as easy as possible for you so that you can focus on running your business.

10 Tips for Contractors and Small-Business Owners

Running a small business or working as an independent contractor can be an exciting and fulfilling way to make a living. Self-employed people also face a whole new set of risks and tax considerations that they have to account for.

Here are 10 tips to help business owners and independent contractors navigate these risks and maximize their profitability:

1. Save for taxes. When you’re self-employed, you don’t have an employer that withholds taxes from your paycheck every two weeks. As a result, it’s essential to put aside roughly 20% to 35% of your income each month to pay for taxes. (Remember: in addition to income taxes, you’re also responsible for the full 15.3% of Social Security and Medicare taxes.) You will also want to make sure you don’t get hit by the underpayment penalty, so you need to make adequate estimated tax payments each quarter.

Understanding and Avoiding the Underpayment Penalty

2. Save for retirement. Many business owners don’t take advantage of the most valuable deduction of all: saving for retirement. A recent study from the American College found that about a third of small-business owners do not have a personal or business-sponsored retirement plan in place.

An IRA or one of the plans that is designed for small businesses, such as a Simplified Employee Pension (SEP) IRA, a Savings Incentive Match Plan for Employees (SIMPLE) 401k, or a SIMPLE IRA, allows you to make tax-deductible contributions for your retirement. And unlike other kinds of business deductions, the benefits of retirement contributions go directly into your pocket.

Saving for Retirement is a Small-Business Owner’s Most Valuable Deduction

With retirement savings—regardless of whether you work for a company or are self-employed—time is of the essence. The earlier you start, the more you are able to leverage the power of compounding gains. At the other end of the spectrum, once you start approaching retirement, you may want to consider making catch-up contributions to make sure you have enough for retirement.

3. Maximize your deductions by tracking your expenses. You can’t claim all of the deductions that are available for business owners and independent contractors if you don’t know what your expenses are. It is extremely important to use QuickBooks or some other bookkeeping system to track your expenses and revenue. Not only will this help you reduce your tax bill and protect yourself in case of an audit, it will also save you money with your accountant. The cleaner and more organized your files are, the easier (and cheaper) it is for your tax advisor to prepare your tax return.

4. Track your auto mileage. Deductions for the business use of your vehicle can generate significant savings. But this is also one of the areas that will be closely examined in an audit. If you want to take advantage of the auto deduction, you need to track your mileage and collect an odometer reading by getting an oil change on (or near) December 31 each year.

Tracking mileage has always been a nuisance for business owners, but now it’s a lot easier thanks to smartphone apps that automatically track your mileage. I use MileIQ, and I highly recommend it. If you use your car for business, you should commit to using MileIQ or one of the other mileage tracker apps starting in 2015.

Get More Mileage Out of the Automobile Deduction

5. Consider forming a legal entity. Setting up your business as a limited liability company (LLC) or an S corporation can provide valuable legal protection for business owners and contractors. It can also result in significant tax savings compared to operating as a sole proprietor or partnership. Consult with your tax and legal advisors to determine what type of entity makes the most sense for your business.

6. Know the home office rules. If you work from home, you might be able to deduct part of your mortgage, insurance, and utilities as a business expense. The rules about home office deductions can be fairly complicated, but thankfully the IRS recently made claiming the deduction a lot simpler by creating a home-office standard deduction.

Introducing the Home Office Standard Deduction

7. Explore your health insurance alternatives. Having to pay for your own healthcare is one of the biggest expenses that small-business owners and contractors face. The private insurance market for individuals has undergone significant changes in recent years because of the Affordable Care Act. It is important to explore the new insurance exchanges and know all of your options for coverage, including high-deductible policies that are linked to a Health Savings Account (HSA), as well as the available tax deductions for healthcare expenses.

8. Don’t forget about other types of insurance. Health issues aren’t the only risks that business owners and contractors need to insure against. You should also evaluate your need for disability, liability, and errors and omissions insurance. Also, if you have employees or hire contractors yourself, you will need to look into whether you need to get workers compensation insurance.

9. Understand the difference between 1099 and W-2 workers. If you hire people to work for your business, you need to know whether these people should be classified as 1099 contractors or W-2 employees. The tax implications of this classification can be fairly significant. While there is no black-and-white rule for making the distinction, generally speaking, the more control you have over the worker, the more likely that the worker is an employee. The IRS provides 10 guidelines to help determine whether a worker is an employee or a contractor.

Employee or Contractor? 10 Ways to Make This Important Distinction

10. Focus on growing the business. When you’re running your own business, it can be very easy to let delivering for existing clients take over all of your time. Sometimes working in the business prevents people from working on the business. Carve out time to market to new customers and think strategically about identifying ways to grow. You also need to dedicate time to learning how to efficiently manage your finances and bookkeeping. The time, energy, and money that you devote to these activities is an investment in the future of your company.

At Eilts & Associates, we work closely with small-business owners and independent contractors to help them navigate all of the financial opportunities and risks facing their businesses. If you have any questions about any of these 10 tips, please contact us at 773-525-6171 or bart@eiltscpa.com.

 

Get More Mileage Out of the Automobile Deduction

For many of my clients, the deductions for business use of an automobile can add up to substantial tax savings at the end of the year. Not surprisingly, the IRS has turned up its efforts to make sure these deductions are legitimate, so I wanted to make sure each of you are aware of a) what constitutes business use of a vehicle and b) what is required of you, the taxpayer, to claim that expense on your tax return.

Before we go any further, let’s clarify what is considered “business use” when it comes to your automobile. Generally speaking, any trip you take in order to conduct business counts as “business use,” except for commuting to and from your office or job site. The only way your commute can be considered as “business use” is if you stop to meet with a client on the way to or from work.

Get Your Mileage Recordkeeping in Gear

There are two basic options for deducting business-related vehicle expenses on your tax return:

1)      Actual method: Deduction equals the total auto expenses incurred during the year multiplied by the percentage that the car was used for business (based on mileage)

2)      Standard mileage rate:  Deduction equals the total miles driven for business purposes multiplied by 56 cents per mile for 2014

Regardless of which method you use, it is going to require some recordkeeping on your part. If you want to take advantage of the auto deduction, you need to track your mileage and collect an odometer reading on December 31 of each year.

Tracking mileage has always been a nuisance for business owners, but now it’s a lot easier thanks to smartphone apps that automatically track your mileage. I use MileIQ, and I highly recommend it. If you use your car for business, you should commit to using MileIQ or one of the other mileage tracker apps starting in 2015.

If you want to track your mileage using the old-fashioned way, you need to get in the habit of keeping a mileage log in your glove compartment. The logbook should include the following information for each trip: the date, destination, distance, and purpose.

Any time the odometer is read by a third party (such as Jiffy Lube, for example) you should keep the receipt because it will help to substantiate your annual odometer readings in case your tax return is selected for examination. This may sound like overkill, but try telling that to the U.S. Tax Court, which ruled a few years ago that a mileage log without an odometer reading does not meet the substantiation requirement. If you are not able to get an oil change on December 31—I trust you can find more exciting ways to spend New Year’s Eve—try to get one a few weeks before or after December 31. This will allow us to back into a reasonable odometer reading.

Why does the IRS put this recordkeeping burden in the laps of taxpayers? Keep in mind that the “R” in IRS stands for “revenue.” The IRS has found that when taxpayers estimate the business use of their vehicles, they tend to overestimate the business miles driven, and these inaccuracies end up costing the U.S. government millions of dollars each year.

If you decide to use the Standard Mileage Rate, then the only other records besides mileage you need to keep are toll receipts (or I-Pass receipts) and parking receipts. If you choose to use the Actual method, then you should keep your receipts for gas, repairs and maintenance, car washes, insurance payments, and parking and tolls. (It used to be okay to use credit card statements to substantiate gas purchases, but now that you can buy food, lottery tickets, alcohol and tobacco products, and in some places just about anything else at gas stations, the IRS no longer accepts credit card statements as proof of vehicle expenses). Lastly, both methods allow you to claim a portion of the interest costs of an auto loan as a business expense, so it is a good idea to put your December car loan statement in with your tax documents for my review.

Standard vs. Actual: Where the Rubber Meets the Road

When choosing between the two methods, several things should be considered. The IRS does not allow you to change your mind year after year unless you chose the Standard Mileage Rate in the first year. Basically, by choosing the Actual method in the first year your vehicle is placed in service, you are committing to that method for the life of the car. Generally speaking, the Actual method can yield a greater deduction in the first five years the car is used because the IRS allows you to take a larger percentage of depreciation in the first few years and later reduces this amount. The Standard Mileage Rate, on the other hand, does not depend on the car’s age; depreciation is already factored in to this rate, which is 56 cents per mile in 2014.

If you are wondering which method is best for you, we need to look at how long you think you will own the car and how committed you are to recordkeeping. It used to be that the Actual method consistently yielded a better deduction, but the IRS substantially increased the Standard Mileage Rate a few years ago when gas prices spiked. Additionally, in an economic environment where people are more likely to hold on to their cars longer, the Standard rate can be more beneficial because of the depreciation factors discussed above.

More Car Talk

As long as we are on the subject of cars, here are a few other auto-related questions I frequently get from clients:

• Is it better to own or lease a vehicle? I get asked this questions a lot, and my answer is always the same: It depends on you. In other words, the tax consequences of owning versus leasing a vehicle are so slight that the decision should be made based on your lifestyle preferences. I will go a step further and mention that this advice is sound for most tax issues. It is almost always best to make your choices based on what works best for you and then look at the tax code to see if it sways your decision. When it comes to owning versus leasing a vehicle, I am confident that it will not.
• Will purchasing a luxury car increase my depreciation deduction? No. Purchasing a more expensive car does not increase your tax deduction because the IRS has placed overall limits on the value of a car that can be considered for business use.

For questions related to automobile deductions or any other deductible business expense, please contact Bart Eilts at 773-525-6171 or bart@eiltscpa.com

IRS Phone Scams: Be On Alert for Fraudulent Calls

Across the country there has been a recent surge in attempted phone scams involving callers pretending to be IRS agents. We wanted to alert you and let you know what to do if you receive one of these calls.

Typically the scammers–who often use fake IRS badge numbers and may have the taxpayer’s Social Security number, home address, or other personal information–attempt to frighten the taxpayer into revealing personal information or sending money.

At Eilts & Associates, we have heard from several clients in the past week who were targeted by one of these scam attempts. In each case, the taxpayer received an automated voicemail from someone claiming to be from the IRS. The “agent” said the taxpayer had an outstanding lawsuit against him from the IRS and needed to call back and send money immediately.

Fortunately, our clients did not fall for the ruse, but many taxpayers around the country are not so lucky. In August the IRS reported that approximately 1,100 taxpayers had lost an estimated $5 million from these scams.

How to spot scams

If you receive a call or email from someone purporting to represent the IRS, here are several telltale ways to identify a fraud:

• Sent by phone or email: The IRS never contacts taxpayers via phone or email. If the IRS wants to contact you about a tax matter, you will receive a letter in the mail.
• Demands immediate payment: To frighten you and create a sense of urgency, the scammers will often demand immediate payment or request some other form of immediate action. The IRS will never do this.
• Requires a specific payment method: The scammers often require that you send payment via a specific method, usually prepaid debit cards or gift cards. Or they may ask you to give your credit card number over the phone. The IRS never requires a specific payment method.
• Threatens to bring in local law enforcement: The scammers may threaten to have the local police or sheriff arrest you if you don’t comply with the caller’s requests. Again, this is something the IRS would never do.

What to do if you’re a target

If you receive one of these calls or emails, the most important thing is to not respond. Never give your credit card or other personal information to a caller or emailer purporting to be an IRS agent. Don’t allow the callers to scare or threaten you. Also, you can report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 800.366.4484 or www.tigta.gov.

At Eilts & Associates, we are always available to help you deal with any issues involving the IRS—whether it’s the actual Internal Revenue Service or criminal impostors. If you receive a call, email, or letter that you suspect might be a scam, please contact us, and we will help you get to the bottom of it.

 

 

Open enrollment–the period when employees are required to select their health insurance and other employer-provided benefits for the upcoming year–is right around the corner. If you’re someone who usually puts the benefits-selection process on cruise control and simply lets the previous year’s selections roll over into the next year, you need to break that habit this fall.

Benefits account for about 30% of an employee’s total compensation on average. Selecting the best benefits options for you and your family and taking advantage of all of the tax-savings opportunities can have a significant impact on your bottom line.

This year it’s more important than ever to take a close look at your employer’s benefit options. Some of the most significant aspects of the Affordable Care Act (ACA) are going into effect in 2015, and, as a result, many companies are significantly altering their health insurance offerings to comply with the landmark healthcare reform law.

Healthcare Reform: A Game-Changer for Health Insurance Plans

Under the ACA, all companies with at least 100 full-time employees will be required to provide health insurance to their employees starting on January 1, 2015. For companies with 50 to 99 employees, the requirement has been pushed back until January 1, 2016. Companies that don’t comply with the requirement face a $2,000 penalty per employee.

These new rules could affect the coverage your employer offers and the premiums employees pay. To comply with the mandate, some companies will be offering health insurance for employees for the first time in 2015. Conversely, some companies may be eliminating coverage for spouses in 2015 as a way to compensate for increased health insurance expenses. Also, the rollout out of online insurance exchanges and the elimination of  coverage denials based on pre-existing conditions, both of which went into effect last year, could drastically change the price and availability of coverage outside of your employer’s plan.

The Affordable Care Act could affect the health insurance coverage your employer offers and the premiums employees pay this open enrollment season.

In light of these changes, you should closely review the insurance options your company is offering for 2015. In the weeks leading up to your open enrollment period, your employer will send you a packet of information outlining the specifics of its 2015 health insurance options. Take time to study this information and think about what your out-of-pocket expenses and total risk exposure could be under different scenarios.

This analysis can be fairly complicated. At Eilts & Associates, we are available to go through the numbers with you and help you understand the financial implications of the different plan options.

Maximize the Value of Other Benefits

Although health insurance gets most of the attention, many companies offer a bevy of other benefits. During the upcoming open enrollment period, it pays to go through each of these options to make sure you aren’t leaving any money or tax benefits on the table.

• Flexible Spending Accounts: Many companies allow their employees to open a Flexible Spending Account (FSA), which lets the employee pay for qualified healthcare expenses with pre-tax dollars.
• Life and disability insurance: If your company offers life and disability insurance, check to make sure the amount of coverage is appropriate for your family situation. Events such as the birth of a child, marriage, or a change in your spouse’s employment status could significantly alter your insurance needs. If you decide to revisit your life or disability insurance plans, we are happy to work with you to help you determine the right amount of coverage for your needs.
• Vision and dental insurance: Check to make sure the benefits and provider options fit with your family’s needs. Depending on the amount of the monthly premiums, it might make sense to forgo this insurance and instead put extra money in your Flexible Spending Account.
• Wellness benefits: Companies are starting to subscribe to the theory that “an ounce of prevention is worth a pound of cure.” That’s why many employers are beginning to offer increased wellness benefits, such as gym membership vouchers and free consultations with nutritionists. Also, many preventative care services, such as physicals, vaccinations, and screenings are fully covered by insurance plans. Make sure you’re taking advantage of all of the different wellness benefits that are available to you.
• Dependent care: Many companies offer some form of dependent care benefits. Plus, you can put up to $5,000 per couple of pre-tax dollars into a Flexible Spending Account to pay for daycare and other qualified dependent care expenses. (The $5,000 limit also applies to single parents.)
• Retirement savings: Although you can make changes to your 401(k) contributions and asset allocation any time during the year, open enrollment is a good time to check in on your progress.

Make the Most of Your Benefits

We all spend a lot of time thinking about ways to secure that next raise or promotion, but one of the easiest ways to increase your total compensation is to maximize the value of your employee benefits. The changes created by healthcare reform for 2015 have created a more dynamic environment for health insurance, so you’ll need to spend extra time studying the plans offered by your employer this year. The open enrollment period is generally limited to a few weeks, so you need to be on the ball this fall and be ready to act fast.

At Eilts & Associates, we are always available to help you analyze your benefit options. Once you receive your benefit summaries from your employer, you can contact us (773.525.6171 or bart@eiltscpa.com) to set up a time to discuss what makes the most sense for your and your family.