Fiscal Cliff Answers: More Questions for Small Business
By: Melanie Berkowitz, Esq., Monster Contributing Writer
Back in November, we reported on Fixing the Fiscal Cliff and what small business owners could expect if Congress did not reach a deal on the so-called fiscal cliff by the close of 2012.
In fact, legislators finally passed a bill warding off the fiscal cliff January 1st to pull the country back up onto solid ground -- sort of.
While the deal averted the predicted economic crisis of rising taxes and dramatic spending cuts, it merely postponed some of the toughest issues for several months.
What Congress did decide could have a significant impact on small business owners, many of whom already report that economic uncertainty is a major roadblock to future growth and hiring.
Personal Tax Rates Rise for the “Wealthiest” Americans
The fiscal cliff deal raises taxes only for those taxpayers who make over $400,000 ($450,000 for married couples) to the pre-Bush era rate of 39.6%. This means that small business owners who report their business income on their personal returns (so-called pass-through entities) face higher tax rates in 2013.
Economists estimate that 0.6% of all taxpayers will be affected by the rate hike. Approximately 750,000 of those are organized as small businesses, according to a 2011 report by the Treasury Department.
Payroll Taxes Rise
Congress allowed the payroll tax holiday to expire on December 31st, which means that payroll taxes will rise for all workers.
While employees will see their payroll taxes increase by 2% to 6.2%, that amount will be doubled for the self-employed, who must pay both the employer and employee side of the tax.
Some Tax Breaks End, Others Extended
The bill’s passages means that small business owners who put off planning for capital expenditures and putting investments back into their businesses can go ahead and schedule these purchases.
The fiscal cliff deal extends certain business tax credits including those that allow business owners to deduct between 6 and 14 percent of their R&D expenditures. Also extended is an allowance for the maximum deduction levels for bonus depreciation and Section 179 expenditures for software and equipment.
The bill also allows capital gains tax rates to rise for the top earners, which could negatively impact investment interest in small or growing companies.
Itemized tax deductions and personal exemptions were also limited for any household making more than $250,000 -- that includes small businesses organized as pass-through entities.
Widespread tax reform was put on the back-burner for now. Most legislators agree it is needed, but tackling the issue will take time and compromise.
Uncertainty Remains about Spending Cuts
Two white elephants remained in the room after the fiscal cliff deal passed:
Sequestration: To avoid the massive automatic defense and non-defense spending cuts that were set to hit on January 1st, Congress agreed to push back the deadline two months.
In the meantime, current expenditures will be paid with a much smaller package of taxes and later spending cuts, leaving the big decisions on which programs and budgets will be reduced or eliminated later in February. The eventual decision could affect small business’ ability to obtain government contracts.
The looming debt ceiling. The recent deal does not address the looming debt ceiling. If lawmakers do not figure out a solution, the government is set to default on the debt, which means that it will not be able to fund additional spending.
One way or another, lawmakers will need to figure out a way to pay for current -- and future -- government spending.
More about Small Business:
- Five Tax Tips for Small Business 2012 Tax Returns
- Small Business Funding: Resources that Can Help Grow your Business
- 2013 Small Business Trends: Known Unknowns Ahead