“For small and medium sized business owners there is good news and bad news in the deal to avoid the fiscal cliff. In addition, the deal strongly underscores the need for business owners to sharpen their own pencils to cut their taxes. NOTE – this article is written after the Senate vote on the Fiscal Cliff deal but before the House has taken any action – will update if there are any substantive tax changes.
First, let’s start with the good news. Greater certainty in taxes (although as you will read below, you may not like what is certain). More than any other issue I hear about from business owners and their accountants is the need for certainty in taxes. A recent study by the Mercatus Center highlights the economic drag of uncertainty in taxes.
The tax deal makes permanent a number of tax provisions (after making changes from current 2012 policy), including the tax rates on ordinary income; estate tax; dividends and capital gains – and best of all, the alternative minimum tax (AMT). NOTE: The payroll tax holiday was ended.
On AMT the current exemption of $33,750 individual and $45,000 married is increased to $50,600 single and $78,750 married and indexes the exemption and phaseout amounts. KEY – this new AMT fix is for tax years beginning after December 31, 2011 – i.e. the 2012 tax year. Happy day.
BUSINESS PROVISIONS EXTENDED (not permanent) – The most important tax credit for small and medium business owners – the Research and Development (R&D) tax credit was extended through 2013 and made retroactive for 2012 (see more below); Work Opportunity Tax Credit extended one year; Section 179 – keeps in place the 2010/2011 levels of a maximum amount of $500k and $2 million phase-out for 2012 and 2013; Accelerated Depreciation — the Senate deal provides for 50 percent expensing for qualifying property purchased and placed in service before January 1, 2014 (and January 1, 2015 for certain long-term assets and transportation).
Now, the bad news – the tax increases – and the hidden tax increases.
ORDINARY INCOME: While the tax deal increases the rates at a higher level than first proposed by the President ($200k single/250k married) – it does increase the rates from 35% to 39.6% at $400k single and $450k married (talk about a marriage penalty). From 2012 tax policy this is a tax increase of $396 billion over 10 years. Don’t forget, there is also the 0.9 percent tax increase on ordinary income over 200k/250k already set to begin in 2013 thanks to the health bill. Given that small and medium businesses are overwhelmingly organized as pass-thrus (LLC’s; S Corps; partnerships) – it is the ordinary income rate that hits these business owners – not the corporate rate (which was untouched in this deal)….”
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