Fiscal-cliff Changes in Tax Law to Affect Small-business Owners

big business vs. small biz - fiscal cliffFrustration, relief and confusion.

Those are the emotions of small-business owners in the wake of the ?fiscal cliff? deal that defined some key tax provisions for businesses and individuals, but left a lingering cloud of uncertainty.

Last week, Congress prevented the nation from falling off the fiscal cliff with a bittersweet compromise. Some business owners said they were relieved that the provision included a permanent fix for the estate tax, but they complained about the immediate sting from the decision to not extend the 2 percentage point reduction in the Social Security payroll tax.

?What do we do? What is really there?? are questions that small-business owners are asking, said J.A. Lesemann Jr., managing member of the Huntersville, N.C., firm Lesemann & Associates and chair of the N.C. Association of Certified Public Accountants.

Lesemann suggests that business owners advise their employees that the payroll tax holiday is over. In 2011 and 2012, workers? Social Security payroll taxes were reduced to 4.2 percent, down from 6.2 percent. Meanwhile, employers continued to pay 6.2 percent of an individual?s total wages.

Business owners and their advocates expressed concern about tax increases on higher-income earners and the delay on deciding on spending cuts to address the debt ceiling.

?As long as the federal government does not have a plan to reduce spending and address the deficit, small-business owners are very concerned in very close future months that the plan that Congress proceeds with will include tax increases,? said Gregg Thompson, the North Carolina director for the National Federation of Independent Businesses.

Mary Brogan, spokesperson for the National Small Business Association, said the lingering national debt could have a chilling effect on growth as businesses hesitate to take on additional employees or debt.

?Consumers, business-to-business transactions, I think everybody is going to tighten things up,? Brogan said.

Accountants for small businesses, however, touted components of the deal that will allow some owners to make retroactive expense deductions, encourage the purchase of new equipment and extend some small-business tax credits.

Many small-business owners expressed concern about the immediate effect of the payroll tax increase, but they said it would take a while to understand how other aspects of the legislation would impact their bottom line.

?(The payroll tax) is going to hurt my employees. It is going to hurt me. It is going to hurt everyone,? said Brian OliverSmith, CEO of Urban Planet Mobile, a Durham, N.C., company that provides mobile digital education products.

OliverSmith is also worried about the impact of increasing taxes on individuals and families earning more than $400,000 and $450,000, respectively.

Businesses such as Urban Planet Mobile expand with the assistance from other business owners, OliverSmith said.

?So if you tax them too aggressively, that goes away,? OliverSmith said.

Brogan said the lowered tax threshold impacts a limited but important group of business owners ? those who are more likely to expand and hire new employees. The limit creates a fairness issue for businesses that pass through income to owners.

Certain shareholders will face a maximum 39.6 percent tax rate, whereas a Wal-Mart or an AT&T is going to be close to a 35 percent tax rate, Brogan said.

S corporations, businesses in which shareholders report profits and losses on individual income tax returns, might want to think about a change in structure, but will face other tax challenges as different entities, accountants said.

?It is kind of that conundrum that they are in,? said Tim Robinson, an accountant with Raleigh, N.C., firm Hughes Pittman & Gupton. ?Which is better??

Despite the concerns, business owners, their advocates and accountants applauded some aspects of the changes.

The legislative compromise includes a change for the estate tax exemption, which was scheduled to drop to $1 million, but will remain at $5.12 million. The maximum tax rate will rise 5 percentage points to 40 percent after reaching that $5.12 million threshold.

The adjustment is key for Mike Strowd, co-owner of Maple View Farm in Hillsborough, N.C. If Strowd?s two daughters were to inherit half the farm under the proposed lower exemption, they would probably have to sell some of the land to pay the tax.

?Then you wouldn?t have enough property for Maple View to exist,? Strowd said.

Increased allowable expensing under Section 179 of the tax code and the extension of the bonus depreciation could be a huge benefit for small businesses, Robinson said.

Limits for Section 179, which allows small businesses to deduct qualified equipment purchases, dipped from $500,000 in 2011 to $125,000 in 2012. The threshold was scheduled to drop to $25,000 in 2013. The fiscal cliff package bumped allowable expensing back to $500,000 in 2013 and 2012, retroactively.

The bonus depreciation, which allows businesses to recover up to 50 percent of the cost of qualified purchases, was also extended through 2014.


?Bush tax cuts: Permanently extends the 2001 and 2003 income tax cuts for individuals and families earning less than $400,000 and $450,000 respectively. Taxable income above those levels faces a 4.6 percent increase to a maximum rate of 39.6 percent.

?Estate tax: Extends the current $5.12 million exemption level, but the maximum rate will jump from 35 percent to 40 percent.

?Section 179 expensing: Increased allowable expensing of $500,000 is extended for 2012 and 2013.

?Bonus depreciation: The increased 50 percent bonus depreciation rules for investment in new property and equipment remain in place for possessions placed in service before the end of 2013.

?Payroll tax reduction: Didn?t extend the 2 percentage point reduction in workers? Social Security payroll tax that was enacted two years ago on employees? portion of the payroll tax.

?Capital gains and dividend taxes: Capital gains and dividends for individuals and families earning below $400,000 and $450,000, respectively, will remain at 15 percent. For those above those thresholds, the dividend tax rate will increase to 20 percent.

?Alternative minimum tax: Includes a fix for the alternative minimum tax, which will increase the exemption amounts to $50,600 for individuals and $78,450 for couples.

Source: MCT Information Services