Small Business Tax Planning in the New Year

Taxes and small businessCongressional members in both the Senate and House have passed a bill that will prevent the fiscal cliff that many small business owners worried about last year. There is both good and bad news regarding changes to the tax law that will affect small businesses in 2013. The Joint Committee on Taxation has compiled 10-year tax estimates. The Senate Finance Committee has disseminated this information.

The new tax deal provides small business owners with more tax certainty by making permanent many tax provisions. These include tax rates on ordinary income in addition to dividends and capital gains. There will be more permanency in the estate tax and in the alternative minimum tax (AMT) in 2013.

This tax legislation extends other business tax provisions that are not permanent. The Research and Development (R&D) tax credit continues through 2013 and the Work Opportunity Tax Credit continues for one year. Two tax incentives encourage small businesses to invest more in the future. The first is the retention of Section 179 for annual small business deductions of equipment and software up to $500,000. The second is accelerated depreciation of property purchased and placed in service before January 1, 2014.

Small business owners may be disappointed with the recent legislation that includes tax increases and hidden tax increases. Individuals earning over $400,000 and married couples earning more than $450,000 will have to pay increased tax rates from 35 percent to 39.6 percent. The tax rate for capital gains and dividends has increased to 20 percent. The estate tax increase of 40 percent to increase federal revenues by $19 billion may significantly affect family-owned businesses. The recent congressional tax deal legislation brings back the bad policies of personal exemption and certain itemized deductions at a higher rate. These are hidden marginal rate increases.

Read more at Forbes.