Tuesday, January 8, 2013

Post-Fiscal Cliff Changes in Federal Tax Law to Affect Small Business Owners

- vbridges@newsobserver.com
Frustration, 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.

A week ago, Congress prevented the nation from falling off the so-called fiscal cliff with a bittersweet compromise. Triangle 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 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 the now total 12.4 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 state 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.

Payroll tax worries
Many small business owners expressed concern about the immediate impact 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 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, Oliver Smith said, “So if you tax them too aggressively, that goes away.”

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 firm Hughes Pittman & Gupton. “Which is better?”

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

The legislative compromise includes a fix 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 fix is key for Mike Strowd, co-owner of Maple View Farm in Hillsborough. If something happened to Strowd, and his two daughters inherited half the farm, 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 expenses 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.

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Read more here: http://www.newsobserver.com/2013/01/07/2586891/beyond-the-cliff-a-tricky-path.html#storylink=cpy

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