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By now, most of us are well aware of the 2012, eleventh-hour, year-end deal and decisions enacted by Congress to avert the Fiscal Cliff crisis. Whether or not those decisions successfully will accomplish that objective remain unknown. The legislation minimizes tax increases for the individual taxpayer, but it is still unknown what consequences those changes will have on long term economic development. However, one thing which is certain is that several of those measures have a direct impact on small to mid-sized businesses, resulting in both positive and negative implications. Several of what could be the most impactful measures on small to mid-sized companies are summarized below.
Permanent Tax Rate on Salary– The tax rate for single income earners with taxable income over $400K or married earners with taxable income over $450K will be capped at 39.6%. Households with income lower than that will remain at the lower tax rate. The majority of small business owners have taxable income that falls under the $400K/$450K threshold, so permanent continuance of that lower tax rate is good news. For business owners with taxable income above the $400K/$450K threshold, the increased tax rate of 36% to 39.6% is not good news; however, it does allow for better tax planning, eliminating uncertainty about the rate.
Section 179 Depreciation Bonus– This incentive has been extended through 2013 providing a 50% tax credit to companies to purchase or lease new equipment. This measure promotes reinvestment in business and is beneficial to small to mid-sized companies, as long as they are willing to buy and in a financial position to make these purchases.
R&D Tax Credit– Like the depreciation bonus, this tax credit has also been extended and was made retroactive to 2011. This provides a 6% – 14% tax break for R&D expenses. Although this is a substantial credit and encourages investment in business growth, it applies only to small to mid-sized businesses that invest in research and development.
Payroll Tax Increase– The Payroll Tax Holiday was not extended as part of the Fiscal Cliff deal. As a result, employers’ share of the Social Security tax rate will revert back to 6.2% from the 4.2% rate that has been effective for the past few years. Although a seemingly small percentage, this increase could have a substantial ramifications on payroll budget for small to mid-sized companies and discourage hiring. The small to mid-sized business sector accounts for a large percentage of job creation, so this may have a negative impact overall on economic expansion.
Work Opportunity Tax Credit (WOTC)– This measure has been extended through 2013, and encourages small businesses to hire underemployed and unemployed groups such as veterans and young people. This should assist in offsetting the payroll tax increase and incent small to mid-sized businesses to continue hiring, thereby promoting business growth.
Estate Planning Exemption Level– One of the most prevalent concerns among small business owners was the estate tax exemption threshold level. The new legislation has that level remaining fixed at $5.12 million, which is great news for small business owners. It was predicted to drop to just over $1 million. This would have been detrimental to many small, family owned businesses that have been family run for generations. In the event of an untimely death, many may have been forced to sell off part of the business or critical assets (such as machinery) to fund estate taxes, especially those companies which were heavily invested in assets but had low liquidity.
Assessing the true impact of these changes will take some time. Hopefully, the pros outweigh the cons for small to mid-sized businesses, and these measures will, in fact, stimulate growth. In the interim, it is more important than ever to have a clear understanding of your company’s financials so that you are informed on which measures you can readily leverage to your company’s advantage. We are currently offering a free 1 hour analysis of your business processes, including budgeting. If you would like to learn more on how Analytix Solutions can help move your business forward, please call me directly at 781.503.9002 or email me at email@example.com
Satish Patel, CPA
President, Analytix Solutions
Satish Patel, Founder-CEO of Analytix Solutions, has more than two decades of experience as a CPA. He has also advised small and mid-sized businesses on diverse matters such as valuation, accounting, and finance. His experience extends to raising capital and arranging for finance from angel investors.
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