Welcome to Our Blog
We’re a San Diego, Calif.-based boutique tax consulting firm focused on personalized tax and financial guidance to individuals and businesses. Here on our blog, you’ll find you’ll find news, insights, and observations from trusted sources in the world of tax planning and and financial guidance.
Dependent Care Assistance Plan COVID-Related Carryover and Tax Relief
Share This Post
According to the law of unintended consequences, decisions and actions always cause unforeseen effects. One of the many unintended consequences of the COVID-19 lockdowns is that many parents and guardians haven’t had to pay nearly as much for daycare in 2020 and 2021 as planned, because they’ve had to keep their young children home.
On its surface, paying less for daycare seems like a good thing — offsetting the inconvenience and burden of having to work at home and care for the children. However, parents and their employers who contributed thousands of dollars to dependent care assistant plans (DCAPs) are understandably concerned and confused about what will happen to that money.
DCAPs have contribution limits, use-it-or-lose-it deadlines, and limits on the amount that can be withdrawn and used each year tax-free. Parents and employers carefully calculate their contributions each year to maximize their tax savings while at the same time avoid the possibility of contributing more than they’ll use and losing the excess.
The COVID-19 lockdowns reduced childcare expenses for many parents, resulting in large excess contributions in DCAP accounts. Luckily, government agencies have provided relief to resolve the issue, but now employers and employees are scrambling to take advantage of the relief and understand the new rules, which is the focus of this week’s post.
Dependent Care Assistant Plan (DCAP) Basics
A DCAP or dependent care flexible spending account (FSA) is an employee benefit plan that provides tax relief to help employees pay for the care of a qualifying dependent. The Internal Revenue Service (IRS) regulations that govern DCAPs (pre-COVID relief) include the following: Continue reading… Continue reading… Continue reading…
Employee or Independent Contractor? The Rule That Never Happened
Share This Post
The more things change, the more they remain the same. Case in point: the U.S. Department of Labor’s guidelines for determining whether someone is an employee or an independent contractor. In September 2020, the Department of Labor (DOL) proposed a rule to clarify employee and independent contractor status under the Fair Labor Standards Act. This rule would have made it easier for workers to be treated as independent contractors instead of as employees. It was scheduled to take effect on March 8, 2021.
In late January 2021, a new administration moved in at 1600 Pennsylvania Avenue NW in Washington, D.C., and delayed the new rule’s effective date. Then they officially withdrew the rule. You could call it “the rule that never happened.” Whether that’s good or bad depends on your circumstances, but withdrawing the rule hasn’t made it any easier to determine whether a worker should be classified as an employee or an independent contractor.
Making this determination has always been a challenge, and it continues to be so. And the fact that some states have their own rules doesn’t help matters in the least. In this post, we explain the rules and tests to shed some light on this perplexing topic.
Why the Distinction Matters
Worker classification has always been a hot-button issue. Pro-business administrations typically lean toward relaxing the rules, so that businesses have more leeway in determining how workers are classified. Some businesses prefer to use independent contractors because they facilitate scalability and generally cost less than employees. In addition, when they have more leeway in deciding who’s an employee and who’s an independent contractor, maintaining compliance with labor laws and tax laws is easier.
Pro-worker administrations, on the other hand prefer that businesses classify more workers as employees to ensure fair treatment, compensation, and benefits. When businesses have more leeway in deciding whether a worker is an employee or independent contractor, some businesses choose to hire fewer employees or even lay off employees or place them on contract (instead of hourly pay or salary) and eliminate their protections and benefits under the law.
The Biden administration would like to see more workers classified as employees and favors an ABC Worker Classification-type Test at the federal level like the test used in several states. However, to date, no federal rule or law has been adopted that requires an ABC test.
The Economic Realities Test
Currently, the DOL uses the economic realities test to classify workers. The economic realities test considers a variety of factors, including the following: Continue reading… Continue reading… Continue reading…
First Look: The Biden Administration’s Proposed Tax Law Changes
Share This Post
When a new administration settles into the White House, you can be certain there will be proposals to change the nation’s tax code. And as Walt Disney once famously said, times and conditions change so rapidly that we must keep our aim constantly focused on the future. And that’s the aim of today’s post.
The fact that the Biden administration is planning to raise taxes is no surprise. The President campaigned on a promise to raise taxes on corporations (from 21 to 28 percent) and on wealthy Americans (those earning more than $400,000 per year). If you ever complained that politicians never follow through on their promises, this is the one exception — the Biden administration will raise taxes. The only question is how?
In late May 2021, the U.S. Treasury Department presented a sneak peek into the administration’s proposed tax law changes in the form of a 114-page document commonly referred to as the “Green Book.” The proposed changes are part of two plans — the American Jobs Plan, geared more toward businesses, and the American Families Plan, focusing on individuals. In this post, we explain many of the proposed changes and highlight how they might impact your taxes moving forward.
The key word here is proposed. It’s too early to tell exactly which proposed tax changes will become law or the extent to which they’ll be modified as they move through Congress. Regardless, here’s what we know about The American Jobs Plan and how it might impact businesses:
The American Jobs Plan
The primary objective of The American Jobs Plan is to create millions of jobs while rebuilding the country’s infrastructure and positioning the United States to out-compete nations like China. To raise revenue to pay for the plan, the administration is considering the following changes to tax law (note: generally, these changes would go into effect after the 2021 tax year): Continue reading… Continue reading… Continue reading…
How to Handle a Taxpayer Identification Verification Request from the IRS
Share This Post
Receiving an unexpected letter from the Internal Revenue Service (IRS) is seldom a good thing, and when it’s asking you to verify your identity, your brain heats up with red flags, warning sirens, questions, and concerns. Have I fallen victim to identity theft? Is this a phishing scam? Are con artists now posing as IRS agents to get my personal information? What should I do?
First and foremost, don’t panic. Most people’s instinct when they receive such a letter is to click a link (if they received it via email) or visit the website or call the phone number provided in the letter to find out what it’s about. And if the letter is part of a phishing scam, that’s exactly what the con artist wants you to do.
Is This Letter Really From the IRS?
If you received a notice out of the blue from the IRS via email, text, or even through one of your social media accounts, it’s probably not from the IRS. That’s not how they roll. When the IRS needs to contact a taxpayer, they typically do so in the form of a printed letter delivered by the U.S. Postal Service (USPS).
If you received a printed letter in the mail, examine the envelop and letter closely for signs of fraud, including the following: Continue reading… Continue reading… Continue reading…
Making Sense of Employer-Sponsored Retirement Plan Options
Share This Post
Establishing a retirement plan for employees can pay off in big ways, and we’re not just talking about the benefits for employees. Small business owners stand to benefit as well.
Small business benefits include:
- Retirement plans improve recruitment and retention of better employees. This is especially important now that COVID restrictions are being lifted, and employers are struggling to entice their best employees back into the office.
- Employer contributions are tax-deductible.
- Assets in the plan grow tax-free.
- Plan options are flexible.
- Tax credits and other tax relief can help offset costs.
Employee benefits include:
- Employee contributions can reduce their taxable income, lowering their taxes.
- Contributions and profits grow tax-free until they’re withdrawn.
- Contributions can be automated through payroll deductions, making it easier to save for retirement.
- Through compounding interest (earning interest on savings and interest), contributions grow faster over time.
- Retirement accounts can be carried from one employer to another.
- Some employees may be eligible for the saver’s credit — a federal income tax credit on top of the tax deduction already allowed for contributions to a retirement account.
- Some plans let employees defer a portion of their compensation into the plan, which can help employees save money on taxes.
- Employees have peace of mind knowing that they’re improving their financial security for their future and retirement.
Choosing the Right Retirement Plan to Offer Your Employees
After deciding to offer a plan, you face the challenge of choosing which plan delivers the most bang for the buck — for both you (the business owner) and your employees. Several options are available, which is great, but without knowing the differences, picking a plan can be so overwhelming that you put off the decision indefinitely.
With that in mind, in this post, we describe the most common retirement plan options — from simplest to most complex — and present the key characteristics of each. As a small business owner, you’ll want to adopt a plan that’s tailored specifically to Continue reading… Continue reading… Continue reading…
Recognizing the Tax Risks of Loan Modifications
Share This Post
Any discussion about the tax risks of loan modifications has to start with the fact that between 2007 and 2010, the United States experienced a subprime mortgage crisis that contributed to a world-wide financial recession that threatened to collapse our economy. In response, the federal government introduced and widely publicized several federal mortgage loan modification programs — each aimed at assisting distressed homeowners by modifying or refinancing mortgage loans that became unaffordable.
If you’re unfamiliar with it, loan modification is the renegotiation of the terms of an existing loan. It may involve a reduction in principal or interest rate, an extension of the length of time for repayment, or a change in loan type (from adjustable rate to a fixed rate, for instance). It can also result in a cancellation of debt (COD) — a situation in which the total amount you pay the lender is less than that required under the original agreement.
From the borrowers’ perspective, a cancellation of debt is a great deal. The only drawback is that the Internal Revenue Service (IRS) is likely to treat the COD as taxable income, which can come as a nasty surprise when tax season hits. Unfortunately, it’s likely to surprise more people this coming tax season because of the increase in loan modifications during the COVID-19 pandemic.
One of our responsibilities here at SWC is to protect our clients from nasty surprises. If you received a 1099-C from your lender or you’ve had a loan modified or are in the process of doing so, we want you to know what to expect and be prepared. One way to do that is by helping you answer common questions like the ones that appear below.
Is My Cancelled Debt Taxable? Answer These Four Questions
According to the IRS, “In general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt is taxable, and you must report the canceled debt on your tax return for the year the cancellation occurs.”
On its surface, that seems simple enough, but when you start digging into the details, determining whether a certain loan modification generated a taxable cancellation of debt (COD) can be challenging. If you renegotiated the terms of a loan, you can determine whether it resulted in taxable COD income by answering these four questions: Continue reading… Continue reading… Continue reading…
Midyear Tax Planning Tips for Individuals and Businesses
Share This Post
If you’re waiting until around the 15th of March — or worse yet, April — to save on your taxes, you’re waiting too long. Sure, you can use certain approaches to trim your taxes when completing your annual tax returns, but the bigger savings come from what you do in the months and years prior to filing.
And with recent changes in the balance of power in Washington, D.C., a little mid-year tax planning is sure to help you avoid some nasty surprises in the Aprils to come. President Biden has released a plan that, if enacted, will result in higher tax rates for certain individual and corporate taxpayers. Only time will tell what will ultimately happen. We’re keeping an eye out for any new tax legislation and will alert you when changes occur. But now is a good time to review your finances, so that if any changes to tax laws do take effect, you’ll be better prepared to act.
In this post, we cover several tax-planning approaches you’ll want to consider now — midway in the year — whether you’re an individual taxpayer or a small-business owner.
SWC Client Reminder: It’s time to schedule your complimentary 2021 Mid-year Tax Planning and Financial Strategy Meeting. Visit www.SteesWalker.com and click on the Contact link at the top of page, followed by the “Schedule Your Appointment Online” button on the next page.
Tax-Planning Strategies for Individual Taxpayers
First, consider some tax-planning approaches for yourself as an individual taxpayer. From revisiting your tax withholding or estimated tax payments and taking advantage of lower tax rates on investment income, to timing your investment gains and losses and taking advantage of expanded credits for kids, there are several strategies you may want to consider.
First up, let’s have another look at your tax withholding and estimated tax payments: Continue reading… Continue reading… Continue reading…
How to Grow Your Business: 4 Surefire Methods
Share This Post
Congratulations! You have built and launched a business. You’re a member of a very select group of individuals. According to the U.S. Bureau of Labor Statistics, of the approximate 209 million working-age people in the U.S., only about 10 percent are self-employed, which includes four percent who own their own business and have employees working for them.
If your business is more than a year old, you’ve crossed a major threshold — more than a fifth of new businesses close after their first year in operation. By the fifth year, the failure rate hits 50 percent.
The main cause of new business failures? Cash flow — more cash flowing out than flowing in. Some of that is due to poor money management, but part is also due to slow or non-existent growth, or even a decline in sales and revenue. Strong growth can drive success even when a business isn’t careful about spending.
The problem is that while entrepreneurs are often superstars when it comes to starting a business, they’re often lousy at managing and growing a business. They may not even be aware of the four ways to grow a business and increase its value.
The 4 Ways to Grow a Business
You can find all sorts of ways to grow a business, but they all boil down to the following four:
- Increase your number of good customers.
- Increase repeat sales.
- Increase average sales value.
- Make each business process more effective.
Yes, that’s it. Four ways to grow your business.
If you’re thinking we missed one — cutting costs — technically speaking, that won’t grow your business. Cutting costs increases profitability, but not revenue. It improves the value of your business only if you reinvest the savings toward growing your business in one of the four ways mentioned above. Instead, if you look at costs through the lens of making your business processes more effective, your focus will be to make sure that every dollar of cost becomes an investment. And investments, not costs, generate returns!
In this post, we bring you up to speed on these four fundamental ways to grow your business and introduce you to a few common approaches for each. We don’t go into detail because every business and business owner/manager is different. We can take a deeper dive and explore specific techniques when we meet with you personally to discuss your business.
Method 1: Increase Your Number of Good Customers
Customer acquisition is where most business owners initially focus on growth. It’s known as the “front end” of marketing because it’s about identifying and connecting directly with prospective customers.
While your business has many techniques available for winning new customers, here we focus on the five biggies: Continue reading… Continue reading… Continue reading…
Working “On” Your Business Rather Than “In” Your Business
Share This Post
If you’re a business owner, chances are good that you are your hardest-working employee. You may even be your only employee. You answer the phones, respond to incoming email messages, and perform all business functions.
It’s probably you who handles the marketing, business development and sales, bookkeeping, customer service, shipping, receiving, inventory management — in addition to developing and offering products or services of value to your customers.
That’s what we refer to as working in your business. Without you, the business would fold, and if you ever wanted to sell your business, you’d find yourself in an acqui-hire scenario, which is a common way of saying that the business is being bought primarily for your skills and expertise, because you are the business.
Imagine This, Instead
You’ve built a business that practically runs itself. You have systems, procedures, and policies in place that provide clear guidance on nearly every aspect of your business. You have a well-trained staff that’s capable of running the business even when you’re not there. You’ve managed to delegate nearly every essential task. You’ve essentially promoted yourself from employee to CEO.
Your focus now is on improving and growing the business — analyzing data, learning more about the sectors and verticals you serve, identifying new opportunities, coming up with new ideas, and developing your overall approach to business. You know, the fun stuff! You meet with your business manager once a week to answer questions, address any problems, and discuss ideas and plans.
You have more flexibility in your schedule and more free time to enjoy life and pursue other interests, more time to spend with family, fewer worries so you can be more present for your loved ones. Your business continues to operate smoothly whether you’re there or not.
You’ve created a self-sustaining business entity. You can sell the business whenever you want for a great price (assuming it’s profitable or has unique assets) and walk away without diminishing its value in any way.
That’s what you get when you work on your business instead of in it.
Beginning with the End in Mind
Most business owners start with little or no forethought or planning. They don’t think ahead about what Continue reading… Continue reading… Continue reading…
AB 80: Another Much-Needed Tax Break for California’s Small Businesses
Share This Post
California business owners received additional tax relief on Friday, April 30, when Governor Gavin Newsom signed Assembly Bill (AB) 80 — a COVID-19 economic recovery package that provides up to $6.8 billion in state tax breaks for California businesses.
Under AB 80, forgiven PPP loans that businesses received from the federal government during the pandemic will not be counted as taxable income, which means businesses that received those loans — and meet certain requirements — can deduct the costs of expenses for those loans. AB 80 also applies to Economic Injury Disaster Loans (EIDL) targeted and advance grants.
According to state officials, the tax breaks will apply to 85 percent of the more than 1 million California businesses that received a combined $97 billion in federal loans. That’s about $96,700 for each business.
Does Your Business Qualify?
To deduct expenses paid with PPP loan forgiven amounts, your business must have Continue reading… Continue reading… Continue reading…