Will You Have to Pay Tax on Your Social Security Benefits?

If you’re getting close to retirement, you may wonder: Are my
Social Security benefits going to be taxed? And if so, how much will you have
to pay?

It depends on your other income. If you’re taxed, between 50%
and 85% of your benefits could be taxed. (This doesn’t mean you pay 85% of your
benefits back to the government in taxes. It merely that you’d include 85% of
them in your income subject to your regular tax rates.)

Crunch the numbers

To determine how much of your benefits are taxed, first
determine your other income, including certain items otherwise excluded for tax
purposes (for example, tax-exempt interest). Add to that the income of your
spouse, if you file joint tax returns. To this, add half of the Social Security
benefits you and your spouse received during the year. The figure you come up
with is your total income plus half of your benefits. Now apply the following
rules:

1. If your income plus half your benefits isn’t above $32,000
($25,000 for single taxpayers), none of your benefits are taxed.

2. If your income plus half your benefits exceeds $32,000 but
isn’t more than $44,000, you will be taxed on one half of the excess over
$32,000, or one half of the benefits, whichever is lower.

Here’s an example

For example, let’s say you and your spouse have $20,000 in
taxable dividends, $2,400 of tax-exempt interest and combined Social Security
benefits of $21,000. So, your income plus half your benefits is $32,900
($20,000 + $2,400 +1/2 of $21,000). You must include $450 of the benefits in
gross income (1/2 ($32,900 − $32,000)). (If your combined Social Security
benefits were $5,000, and your income plus half your benefits were $40,000, you
would include $2,500 of the benefits in income: 1/2 ($40,000 − $32,000) equals
$4,000, but 1/2 the $5,000 of benefits ($2,500) is lower, and the lower figure
is used.)

Important: If you
aren’t paying tax on your Social Security benefits now because your income is
below the floor, or you’re paying tax on only 50% of those benefits, an
unplanned increase in your income can have a triple tax cost. You’ll have to
pay tax on the additional income, you’ll have to pay tax on (or on more of )
your Social Security benefits (since the higher your income the more of your
Social Security benefits that are taxed), and you may get pushed into a higher
marginal tax bracket.

For example, this situation might arise if you receive a large
distribution from an IRA during the year or you have large capital gains.
Careful planning might be able to avoid this negative tax result. You might be
able to spread the additional income over more than one year, or liquidate
assets other than an IRA account, such as stock showing only a small gain or
stock with gain that can be offset by a capital loss on other shares.

If you know your Social Security benefits will be taxed, you can
voluntarily arrange to have the tax withheld from the payments by filing a Form
W-4V. Otherwise, you may have to make estimated tax payments. Contact us for
assistance or more information.

© 2020

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by Dukhon Tax

CARES Act made changes to excess business losses

The Coronavirus Aid, Relief and Economic Security (CARES) Act
made changes to excess business losses. This includes some changes that are
retroactive and there may be opportunities for some businesses to file amended
tax returns.

If you hold an interest in a business, or may do so in the
future, here is more information about the changes.

Deferral of the excess business loss limits

The Tax Cuts and Jobs Act (TCJA) provided that net tax losses
from active businesses in excess of an inflation-adjusted $500,000 for joint
filers, or an inflation-adjusted $250,000 for other covered taxpayers, are to
be treated as net operating loss (NOL) carryforwards in the following tax year.
The covered taxpayers are individuals, estates and trusts that own businesses
directly or as partners in a partnership or shareholders in an S corporation.

The $500,000 and $250,000 limits, which are adjusted for inflation
for tax years beginning after calendar year 2018, were scheduled under the TCJA
to apply to tax years beginning in calendar years 2018 through 2025. But the
CARES Act has retroactively postponed the limits so that they now apply to tax
years beginning in calendar years 2021 through 2025.

The postponement means that you may be able to amend:

1. Any filed 2018 tax returns that reflected a disallowed
   excess business loss (to allow the loss in 2018) and
2. Any filed 2019 tax returns that reflect a disallowed 2019
   loss and/or a carryover of a disallowed 2018 loss (to allow the 2019 loss
   and/or eliminate the carryover).

Note that the excess business loss limits also don’t apply to
tax years that begin in 2020. Thus, such a 2020 year can be a window to start a
business with large up-front-deductible items (for example capital items that
can be 100% deducted under bonus depreciation or other provisions) and be able
to offset the resulting net losses from the business against investment income
or income from employment (see below).

Changes to the excess business loss limits 

The CARES Act made several retroactive corrections to the excess
business loss rules as they were originally stated in the 2017 TCJA.

Most importantly, the CARES Act clarified that deductions, gross
income or gain attributable to employment aren’t taken into account in
calculating an excess business loss. This means that excess business losses
can’t shelter either net taxable investment income or net taxable employment
income. Be aware of that if you’re planning a start-up that will begin to
generate, or will still be generating, excess business losses in 2021.

Another change provides that an excess business loss is taken
into account in determining any NOL carryover but isn’t automatically carried
forward to the next year. And a generally beneficial change states that excess
business losses don’t include any deduction under the tax code provisions
involving the NOL deduction or the qualified business income deduction that
effectively reduces income taxes on many businesses. 

And because capital losses of non-corporations can’t offset
ordinary income under the NOL rules:

• Capital loss deductions aren’t taken into account in
  computing the excess business loss and
• The amount of capital gain taken into account in
  computing the loss can’t exceed the lesser of capital gain net income from
  a trade or business or capital gain net income.

Contact us with any questions you have about this or other tax
matters.

© 2020

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by Dukhon Tax

Take a fresh look at your company’s brand

A strong, discernible brand is important for every business.
Even a company that never undertakes a formal branding effort will, over time,
establish a brand through its communications with customers and interactions
with the public. For this reason, it’s a good idea to regularly take a fresh
look at your brand and determine whether tweaks or even a major overhaul may be
in order.

Who are you?

When reassessing your brand, consider the strengths of your
business and whether these have evolved over time — or very recently. Some
companies have pivoted during the COVID-19 pandemic to address the changed
circumstances of daily life. Look at strong suits such as:

• Distinctive skills, such as excellence in product
  design,
• Exceptional customer service,
• Providing superior value for your price points, and
• Innovation in your industry.

You need to match your business’s passions and strengths to your
customers’ needs and wants. To that end, ask current customers what they like
about doing business with you. Survey both customers and prospects about what
they consider when making buying decisions.

What’s your personality?

Look at any widely known brand and you’ll see a logo and
branding effort that conveys a certain personality. Some companies want to
appear creative and playful; others want to communicate stability and security.

What personality will draw today’s
customers to your business? You may think that every company in your line of
business has pretty much the same target audience. If that’s true, you must
come up with an edge that differentiates your company from its rivals.

Businesses tend to have various points of contact with customers
ranging from business cards to print advertisements or catalogs to the front
page of your website to social media accounts. All play a role in your brand’s
personality. Review what your company does at each point of contact,
considering whether and how these efforts accurately and effectively represent
the business’s core values and emphasize its strengths. Doing so will give you
more insight into the best way to portray your personality through your brand.

What’s the competition up to?

No company is an island. Your competitors have brands all their
own — and they’re after your target audience. So, in creating or refining a
brand, you’ll need to identify their tactics and come up with countermeasures.
To do so, engage in competitive intelligence gathering by looking at their:

• Latest products or services,
• Current prices and special offers,
• Marketing and advertising methods, and
• Social media activities.

Sometimes a full rebranding campaign may be necessary to
differentiate yourself from a competitor. For example, let’s say a major player
has entered your market and you’re worried about visibility, or perhaps your
brand is blurring together with a competitor’s.

Are you making an impression?

In the end, branding can make a big difference in whether your
business gets lost in the shuffle or makes a singular impression. Our firm can
help you assess your marketing budget, including allocations for branding, and
identify opportunities for cost-effective improvements.

© 2020

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by Dukhon Tax

What happens if an individual can’t pay taxes

While you probably don’t have any problems paying your tax
bills, you may wonder: What happens in the event you (or someone you know)
can’t pay taxes on time? Here’s a look at the options.

Most importantly, don’t let the inability to pay your tax
liability in full keep you from filing a tax return properly and on time. In
addition, taking certain steps can keep the IRS from instituting punitive
collection processes.

Common penalties

The “failure to file” penalty accrues at 5% per month or part of
a month (to a maximum of 25%) on the amount of tax your return shows you owe.
The “failure to pay” penalty accrues at only 0.5% per month or part of a month
(to 25% maximum) on the amount due on the return. (If both apply, the failure
to file penalty drops to 4.5% per month (or part) so the combined penalty
remains at 5%.) The maximum combined penalty for the first five months is 25%.
Thereafter, the failure to pay penalty can continue at 0.5% per month for 45
more months. The combined penalties can reach 47.5% over time in addition to
any interest.

Undue hardship extensions

Keep in mind that an extension of time to file your return doesn’t
mean an extension of time to pay
your tax bill. A payment extension may be available, however, if you can show
payment would cause “undue hardship.” You can avoid the failure to pay penalty
if an extension is granted, but you’ll be charged interest. If you qualify,
you’ll be given an extra six months to pay the tax due on your return. If the
IRS determines a “deficiency,” the undue hardship extension can be up to 18 months
and in exceptional cases another 12 months can be added.

Borrowing money

If you don’t think you can get an extension of time to pay your
taxes, borrowing money to pay them should be considered. You may be able to get
a loan from a relative, friend or commercial lender. You can also use credit or
debit cards to pay a tax bill, but you’re likely to pay a relatively high
interest rate and possibly a fee.

Installment agreement

Another way to defer tax payments is to request an installment
payment agreement. This is done by filing a form and the IRS charges a fee for
installment agreements. Even if a request is granted, you’ll be charged
interest on any tax not paid by its due date. But the late payment penalty is
half the usual rate (0.25% instead of 0.5%), if you file by the due date
(including extensions).

The IRS may terminate an installment agreement if the
information provided in applying is inaccurate or incomplete or the IRS
believes the tax collection is in jeopardy. The IRS may also modify or
terminate an installment agreement in certain cases, such as if you miss a
payment or fail to pay another tax liability when it’s due.

Avoid serious consequences

Tax liabilities don’t go away if left unaddressed. It’s
important to file a properly prepared return even if full payment can’t be
made. Include as large a partial payment as you can with the return and work
with the IRS as soon as possible. The alternative may include escalating
penalties and having liens assessed against your assets and income. Down the road,
the collection process may also include seizure and sale of your property. In
many cases, these nightmares can be avoided by taking advantage of options
offered by the IRS.

© 2020

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by Dukhon Tax

The President’s action to defer payroll taxes: What does it mean for your business?

On August 8, President Trump signed four executive actions,
including a Presidential Memorandum to defer the employee’s portion of Social
Security taxes for some people. These actions were taken in an effort to offer
more relief due to the COVID-19 pandemic.

The action only defers the taxes, which means they’ll have
to be paid in the future. However, the action directs the U.S. Treasury
Secretary to “explore avenues, including legislation, to eliminate the
obligation to pay the taxes deferred pursuant to the implementation of this
memorandum.”

Legislative history

On March 18, 2020, President Trump signed into law the
Families First Coronavirus Response Act. A short time later, President Trump
signed into law the Coronavirus, Aid, Relief and Economic Security (CARES) Act.
Both laws contain economic relief provisions for employers and workers affected
by the COVID-19 crisis.

The CARES Act allows employers to defer paying their portion of
Social Security taxes through December 31, 2020. All 2020 deferred amounts
are due in two equal installments — one at the end of 2021 and the other at the
end of 2022.

New bill talks fall apart 

Discussions of another COVID-19 stimulus bill between Democratic
leaders and White House officials broke down in early August. As a result,
President Trump signed the memorandum that provides a payroll tax deferral for
many — but not all — employees.

The memorandum directs the U.S. Treasury Secretary to defer
withholding, deposit and payment of the tax on wages or compensation, as
applicable, paid during the period of September 1, 2020, through
December 31, 2020. This means that the employee’s share of Social Security
tax will be deferred for that time period.

However, the memorandum contains the following two conditions:

• The deferral is available with respect to any
  employee, the amount of whose wages or compensation, as applicable,
  payable during any biweekly pay period generally is less than $4,000,
  calculated on a pretax basis, or the equivalent amount with respect to
  other pay periods; and 
• Amounts will be deferred without any penalties,
  interest, additional amount, or addition to the tax. 

The Treasury Secretary was ordered to provide guidance to
implement the memorandum.

Legal authority

The memorandum (and the other executive actions signed on August
8) note that they’ll be implemented consistent with applicable law. However,
some are questioning President Trump’s legal ability to implement the employee
Social Security tax deferral.

Employer questions

Employers have questions and concerns about the payroll tax
deferral. For example, since this is only a deferral, will employers have to
withhold more taxes from employees’ paychecks to pay the taxes back, beginning
January 1, 2021? Without a law from Congress to actually forgive the
taxes, will employers be liable for paying them back? What if employers can’t
get their payroll software changed in time for the September 1 start of the
deferral? Are employers and employees required to take part in the payroll tax
deferral or is it optional?

Contact us if you have questions about how to proceed. And stay
tuned for more details about this action and any legislation that may pass
soon.

© 2020

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by Dukhon Tax

5 common accounting software mistakes to avoid

No company can afford to operate without the right accounting
software. When considering whether to buy a new product or upgrade their
current solutions, however, business owners often fall prey to some common
mistakes. Here are five gaffes to avoid:

1. Relying on a generic solution. Some
companies rush into buying an accounting system without stopping to consider
all their options. Perhaps most important, they may be missing out on specific
versions for their industries.

For instance, construction companies can choose from many
applications with built-in features specific to how their businesses work.
Nonprofit organizations also have industry-specific accounting software. If you
haven’t already, check into whether a product addresses your company’s area of
focus.

2. Spending too much or too little. When
buying or upgrading something as important as an accounting system, it’s easy
to overspend. Those bells and whistles can be enticing. Then again,
frugal-minded business owners may underspend, picking up a low-end product and
letting staff deal with the headaches.

The ideal approach generally lies somewhere in the middle.
Perform a thorough review of your accounting needs, transaction volume and
required reports, as well as your employees’ proficiency and the availability
of tech support. Then calculate a reasonable budgeted amount to spend.

3. Getting stuck in a rut. Assuming
you already have an accounting system, one of the keys to managing it is
knowing precisely when to upgrade. You don’t want to spend money unnecessarily,
but you also shouldn’t risk errors or outdated functionality by waiting too
long.

There’s no one-size-fits-all answer. Your financial statements
are a potentially helpful source of information. A general rule of thumb says
that, when revenues hit certain benchmarks (perhaps $5 million,
$10 million or $15 million), a business may want to start thinking
“upgrade.” The right tipping point depends on various factors, however.

4. Neglecting the importance of integration
and mobile access. Once upon a time, a company’s accounting
software was a standalone application, and data from across the company had to
be manually entered into the system. But integration is the name of the game
these days. You should be able to integrate your accounting system with all (or
most) of your other software so that data can be shared seamlessly and
securely.

Also consider the availability and functionality of mobile
access to your accounting system. Many solutions now include apps that users
can use on their smartphones or tablets.

5. Going it alone. Which
accounting package you choose may seem an entirely internal decision. After
all, you and your staff will be the ones using it, right? But you may be
forgetting one rather obvious person who could help: your accountant.

We can help you assess and determine your accounting needs, set
a feasible budget, choose the right solution (or upgrade) and implement it properly.
Going forward, we can even periodically test your system to ensure it’s
providing accurate data and generating the proper reports.

© 2020

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by Dukhon Tax

More parents may owe “nanny tax” this year, due to COVID-19

In the COVID-19 era, many parents are hiring nannies and
babysitters because their daycare centers and summer camps have closed. This
may result in federal “nanny tax” obligations.

Keep in mind that the nanny tax may apply to all household
workers, including housekeepers, babysitters, gardeners or others who aren’t
independent contractors.

If you employ someone who’s subject to the nanny tax, you aren’t
required to withhold federal income taxes from the individual’s pay. You only
must withhold if the worker asks you to and you agree. (In that case, ask the
nanny to fill out a Form W-4.) However, you may have other withholding and
payment obligations.

Withholding FICA and FUTA

You must withhold and pay Social Security and Medicare taxes
(FICA) if your nanny earns cash wages of $2,200 or more (excluding food and
lodging) during 2020. If you reach the threshold, all of the wages (not just
the excess) are subject to FICA.

However, if your nanny is under 18 and childcare isn’t his or
her principal occupation, you don’t have to withhold FICA taxes. Therefore, if
your nanny is really a student/part-time babysitter, there’s no FICA tax
liability.

Both employers and household workers have an obligation to pay
FICA taxes. Employers are responsible for withholding the worker’s share of
FICA and must pay a matching employer amount. FICA tax is divided between
Social Security and Medicare. Social Security tax is 6.2% for the both the
employer and the worker (12.4% total). Medicare tax is 1.45% each for both the
employer and the worker (2.9% total).

If you prefer, you can pay your nanny’s share of Social Security
and Medicare taxes, instead of withholding it from pay.

Note: It’s unclear how these taxes will be affected by the
executive order that President Trump signed on August 8, which allows payroll
taxes to be deferred from September 1 through December 31, 2020.

You also must pay federal unemployment (FUTA) tax if you pay
$1,000 or more in cash wages (excluding food and lodging) to your worker in any
calendar quarter of this year or last year. FUTA tax applies to the first
$7,000 of wages. The maximum FUTA tax rate is 6%, but credits reduce it to 0.6%
in most cases. FUTA tax is paid only by the employer.

Reporting and paying

You pay nanny tax by increasing your quarterly estimated tax
payments or increasing withholding from your wages — rather than making an
annual lump-sum payment.

You don’t have to file any employment tax returns, even if
you’re required to withhold or pay tax (unless you own a business, see below).
Instead, you report employment taxes on Schedule H of your tax return.

On your return, you include your employer identification number
(EIN) when reporting employment taxes. The EIN isn’t the same as your Social
Security number. If you need an EIN, you must file Form SS-4.

However, if you own a business as a sole proprietor, you must
include the taxes for your nanny on the FICA and FUTA forms (940 and 941) that
you file for your business. And you use the EIN from your sole proprietorship
to report the taxes. You also must provide your nanny with a Form W-2.

Recordkeeping

Maintain careful tax records for each household employee. Keep
them for at least four years from the later of the due date of the return or
the date the tax was paid. Records include: employee name, address, Social
Security number; employment dates; wages paid; withheld FICA or income taxes;
FICA taxes paid by you for your worker; and copies of forms filed.

Contact us for help or with questions about how to comply with
these requirements.

© 2020

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by Dukhon Tax

The possible tax consequences of PPP loans

If your business was fortunate enough to get a Paycheck
Protection Program (PPP) loan taken out in connection with the COVID-19 crisis,
you should be aware of the potential tax implications.

PPP basics

The Coronavirus Aid, Relief and Economic Security (CARES) Act,
which was enacted on March 27, 2020, is designed to provide financial
assistance to Americans suffering during the COVID-19 pandemic. The CARES Act
authorized up to $349 billion in forgivable loans to small businesses for job
retention and certain other expenses through the PPP. In April, Congress
authorized additional PPP funding and it’s possible more relief could be part
of another stimulus law.

The PPP allows qualifying small businesses and other
organizations to receive loans with an interest rate of 1%. PPP loan proceeds
must be used by the business on certain eligible expenses. The PPP allows the
interest and principal on the PPP loan to be entirely forgiven if the business
spends the loan proceeds on these expense items within a designated period of
time and uses a certain percentage of the PPP loan proceeds on payroll
expenses.

An eligible recipient may have a PPP loan forgiven in an amount
equal to the sum of the following costs incurred and payments made during the
covered period:

1. Payroll costs;
2. Interest (not principal) payments on covered mortgage
   obligations (for mortgages in place before February 15, 2020);
3. Payments for covered rent obligations (for leases that
   began before February 15, 2020); and
4. Certain utility payments.

An eligible recipient seeking forgiveness of indebtedness on a
covered loan must verify that the amount for which forgiveness is requested was
used to retain employees, make interest payments on a covered mortgage, make
payments on a covered lease or make eligible utility payments.

Cancellation of debt income

In general, the reduction or cancellation of non-PPP
indebtedness results in cancellation of debt (COD) income to the debtor, which
may affect a debtor’s tax bill. However, the forgiveness of PPP debt is
excluded from gross income. Your tax attributes (net operating losses, credits,
capital and passive activity loss carryovers, and basis) wouldn’t generally be
reduced on account of this exclusion.

Expenses paid with loan proceeds

The IRS has stated that expenses paid with proceeds of PPP loans
can’t be deducted, because the loans are forgiven without you having taxable
COD income. Therefore, the proceeds are, in effect, tax-exempt income. Expenses
allocable to tax-exempt income are nondeductible, because deducting the
expenses would result in a double tax benefit.

However, the IRS’s position on this issue has been criticized
and some members of Congress have argued that the denial of the deduction for
these expenses is inconsistent with legislative intent. Congress may pass new
legislation directing IRS to allow deductions for expenses paid with PPP loan
proceeds.

PPP Audits

Be aware that leaders at the U.S. Treasury and the Small
Business Administration recently announced that recipients of Paycheck Protection
Program (PPP) loans of $2 million or more should expect an audit if they apply
for loan forgiveness. This safe harbor will protect smaller borrowers from PPP
audits based on good faith certifications. However, government leaders have
stated that there may be audits of smaller PPP loans if they see possible
misuse of funds.

Contact us with any further questions you might have on PPP loan
forgiveness.

© 2020

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by Dukhon Tax

Thoughtful onboarding is more important than ever

Although many businesses have had to reduce their workforces
because of the COVID-19 pandemic, others are hiring or may start adding
employees in the weeks or months ahead. A thoughtful onboarding program has
become more important than ever in today’s anxious environment of safety
concerns and compliance challenges.

Crucial opportunity

Onboarding refers to “[a formal] process of helping new hires adjust
to social and performance aspects of their new jobs quickly and smoothly,”
according to the Society for Human Resource Management.

Traditionally, a comprehensive onboarding program’s objective is
to deliver multiple benefits to the company. These include stronger employee
performance and productivity, higher job satisfaction and a deeper commitment
to the business. New hires who are properly onboarded should also experience
reduced stress and an enhanced sense of career direction.

What’s more, an onboarding program allows you to be crystal
clear about compliance procedures, HR policies, compensation and benefits
offerings. In other words, this is a crucial opportunity for you to explain to
a new hire many issues, including all the measures you’re using to cope with
the COVID-19 crisis.

3 parts to a program

What does a comprehensive onboarding program look like?
Specifics will depend on the size, industry and nature of your company.
Generally, however, an onboarding program can be segmented into three parts:

1. Preparing for the job. The
onboarding process should begin before
a new hire starts work. This involves steps such as discussing his or her
specific acclimation needs, choosing and preparing a workspace (or introducing
the platform and procedures for working remotely), and designating a coach or
mentor.

2. Optimizing day one. As the
saying goes, “You never get a second chance to make a good first impression.”
An onboarding program might involve an itemized start-date schedule that lays
out everything from who will greet the new employee at the door — or who will
conduct a first-day video call — to what paperwork must be completed to a
detailed itinerary of meetings (virtual or otherwise) throughout the day.

3. Following up regularly. Even a
great first day can mean nothing if a new hire feels ignored thereafter. An
onboarding program could establish continuing check-in meetings with the
employee’s direct supervisor and coach/mentor for the first 30 or 60 days of
employment. From then on, interactions with the coach/mentor could be arranged
at longer intervals until the employee feels comfortable.

When the time is right

Onboarding in the year 2020 and beyond involves so much more
than giving new employees their marching orders. It entails helping a new hire
feel safe, supported and fully informed. We can help you calculate when the
time is right to expand your workforce and accurately measure the productivity
of workers added to your payroll.

© 2020

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by Dukhon Tax