As the full effect of the fiscal cliff deal continues to unfold, small business owners are educating themselves on its long-term implications. Considering America’s 28 million small businesses are deemed by the U.S. Small Business Administration (SBA) the “backbone of our nation’s economy,” not surprisingly, the full impact will be significant.
Jim Lee, professor of economics at Texas A&M University-Corpus Christi, said small businesses are particularly vulnerable to the fiscal cliff deal, because many small business owners pay taxes on business profits through individual tax returns.
“Any deal that will impact individual income taxes will affect small businesses and their owners, as opposed to employees who pay individual income tax on their wages and salaries,” he said. “Businesses tend to earn more revenues (or incomes), making their owners more easily subject to higher income tax brackets, given the current progressive tax system.”
And the new deal on the tax for the so-called “rich,” including the new tax rate and alternative minimum tax, would create a disproportionally greater tax burden on them, Lee added. It is much more easy for an individual to earn $400,000 if they are a business owner versus an employee.
“Like most workers,” Lee said, “small business owners have already faced more Social Security, or payroll, tax when it was revert back to the 6.2 percent rate in 2013. But, because many business owners are also self-employed taxpayers, they have to pay both the employer and employee portion of payroll taxes, making a combined payroll tax rate of 15.3 percent.
Capital One Bank offered several tips for small business owners, as they gear up to protect their business credit in 2013, which some analysts see as uncertain economic times.
Much of their advice is common sense, such as paying bills on time. Simple as it seems, this is still a major hurdle for many small businesses. Even being one day late can negatively impact a credit rating, so business customers are advised to pay on time, every time.
Many small businesses have found that setting up online billing payments for monthly bills (such as utilities) helps keep track of bills, establishing a more timely payment schedule. Late bills are certain to incur late fees and extra surcharges.
Lee added the onus will fall upon small business owners themselves to be aware of any changes in tax code that will affect individual taxpayers, as well as business owners.
According to an article attributed to SBA Administrator Karen Mills, there are a number of small business tax credits worth researching. The R&D Tax Credit extends the research and experimentation tax credit, which had officially expired at the end of 2011, through 2013. In addition, the law allows businesses to apply the credit retroactively to investments made in 2012.
The Section 179 Deduction permits small businesses to deduct the cost of certain new and used property placed in service for the year, rather than depreciate those costs over time. The new law extends the maximum deduction to $500,000 for the 2012 and 2013 tax years for companies with under $2 million in qualifying capital expenditures.
The Bonus Depreciation provision enables small businesses to recover the costs of qualified new equipment faster than the ordinary schedule, by permitting the depreciation of 50 percent of the cost in the first year. The provision was set to expire at the end of 2012, but has been extended through the end of 2013 (and 2014 for certain types of property).
The Work Opportunity Tax Credit extends through 2013 the tax credits for employers who hire military veterans or individuals from underserved communities that have faced barriers to employment.
There are a handful of other targeted tax credits that were extended for 2012 and 2013, including: the new markets tax credit for businesses that invest in certain community development entities and other qualified investments; a reduction in the recognition period for S-corporation built-in gains tax; and a reduction in the time from 39 years to 15 over which a business can recover the cost of certain leasehold improvements, according to the SBA.
The tax credits will be a welcomed sight to weary small businesses who will feel the pinch of greater tax burdens in 2013.
“Small business owners need to be aware of any change in the tax code that will affect individual taxpayers, particularly the tax rates for so-called the “rich” and for capital gains or dividends that they may also earn,” Lee said.
“As the nation’s debt problem looms, more taxes are imminent, unless the government will bite the bullet of cutting spending. And the owners of small businesses are more likely to bear this increasingly higher tax burden than other individuals,” he added.