One of the most talked-about provisions of the New Years Day tax deal Congress passed early this year is the one that raises the marginal rate for high-income households. Indeed, individuals earning $400,000 or more will see their marginal tax rates rise to more than 39 percent from the 35 percent they had paid since the Bush-era tax cut took effect early last decade.
But is this the provision that should concern most small-business owners? True, entrepreneurs whose businesses net them more than $400,000 could see a substantial tax increase, but they are members of a miniscule group even among members of their business-owning cohort.
The American Tax Payer Relief Act of 2012 – the deal that averted the fiscal cliff – contains some notable perks for small-business owners. Various provisions extend or introduce rules that enable small-business owners to take deductions sooner on big-ticket purchases like equipment, pay little or no tax on gains reaped from shares in small businesses, and earn tax credits for hiring members of certain groups the federal government considers disadvantaged.
That said, a number of rules within the act warrant business owners’ attention for their potential to make running a business more costly and to prompt entrepreneurs to reconsider the structures with which they organize their firms.
The Library of Congress summary of the act notes its “Business Tax Extenders” section retains certain perks that would otherwise have expired, like the one that “increases expensing allowances for depreciable business property.”
That’s a fancy way of describing the process by entrepreneurs write-off the cost of purchasing big-ticket items that they expect to last a number of years.
In a post on the New York Times’ “Your’re the Boss” blog, reporter Robb Mandelbaum wrote this provision – known as Section 179 Expensing – “allows small companies to fully expense many investments in one year instead of five.”
He adds that had Congress failed to address this provision, he wrote, the maximum investment amount small-business owners could write off in a single year would have dropped to a mere $25,000. Instead, he writes, the maximum will remain $500,000 — which it’s been since 2010 — through the end of this year.
Another provision that could help small-business owners offers what the Library of Congress summary refers to as “100 percent exclusion from gross income of gain from the sale or exchange of certain small business stock.”
This means an entrepreneur or investor can omit money she reaps from the sale of a business or small-business stock when she adds up her income at tax time.
Madelbaum writes in his post that this exclusion is a stimulus-era provision that would – had Congress failed to act – expired more than one year ago.
Congress depends on the private sector to create jobs, and this year’s Act makes it a bit less costly for them to do it, extendings the Work Opportunity Tax Credit, which rewards employers with credits of between $2,400 and $9,600 for hiring individuals from groups the government considers disadvantaged.
This group includes veterans, recipients of welfare benefits, ex-felons and others; the United States Department of Labor provides a list, along with guidelines for participating in the program.
While certain parts of the Act could well make small-business owners’ lives easier and less costly, others will prompt them to reconsider basic questions like how best to register their respective firms.
MetroWest Daily News columnist Christopher Borden notes new rules might S-Corporations and limited liability companies – both favored because they allow owners to report business profits on their personal tax returns – somewhat less desirable.
“Now, the C-Corporation’s highest tax bracket is lower than the highest personal tax bracket. The spread may provide opportunities to defer compensation,” Borden writes.
The new year also may bring new costs: Tony Nitti, a CPA who writes for Forbes.com, noted in a recent column that a provision of the Affordable Care Act that takes effect this year could result in silent partners in S-Corporations paying an additional, 3.8 percent Medicare tax on the investment income they draw from these firms.
The good news is the new tax Act has less about which to despair than some would have small-business owners believe; there are even some perks that will make their lives a little easier. To make sure no new rule catches you off-guard, do consult a tax professional or financial planner who can help you navigate the new regulations.
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