Last week we covered how the "fiscal cliff" deal may affect individuals. This week, we examine how the deal may shape small businesses in 2013.
Since small businesses are owned by individuals, the changes shared last week will essentially be the same. However, impacts on business owners directly correlate to the success and growth of their businesses.
Adjusting the alternative minimum tax thresholds annually for inflation is helpful to businesses that pay taxes through the individual tax system because they now know what they are dealing with and can plan accordingly. However, other elements are not as beneficial.
Entrepreneur.com's "The Fiscal Cliff Deal and Small-Business Job Creation" notes that the "deal isn't good for small-business employment, historically an important source of job creation." The article shares three major components that discourage small-business job creation: ending the payroll-tax holiday, creating higher marginal tax rates on the wealthy, and increasing capital-gains taxes.
Let us take a look at each of these, plus another, the expensing tax.
* An end to the payroll-tax holiday. This provided employees with 2 percent relief on the Social Security tax. The payroll tax cut fact sheet for the Joint Economic Committee of the United States Congress explains that the payroll tax cut for 2012 boosted economic growth nationally by an estimated 0.5 percent in 2012 and saved or created an estimated 400,000 jobs. However, it was allowed to expire, meaning less take-home pay for employees.
Had the credit been kept, we would have seen a $100 billion boost to the economy in 2013, according to Mark Zandi of Moody's economy.com. Now, the trimming of disposable income will translate into less spending, reduced revenues and fewer jobs saved or created.
* Higher marginal tax rates on "the wealthy." Most small businesses are flow-through entities where individual owners are taxed on the profits. Individuals earning more than $400,000 a year and married couples earning more than $450,000 a year will confront an income tax climb of 4.6 percent, plus a 0.9 percent increase in Medicare tax.
For many small-business owners, that is 5.5 percent more in taxes in 2013, before any other business increases they may face. Not to mention the reinstated limitation on itemized deductions.
A report on the long-run macroeconomic impact of increasing tax rates on high-income taxpayers in 2013 finds that marginal tax rates result in a smaller economy, fewer jobs, less investment and lower wages.
* Higher tax rates on capital gains and dividends. With a 5 percentage-point increase (from 15 percent to 20 percent) for individuals earning more than $400,000 a year and married couples earning more than $450,000 a year, this move is expected to deter investments, which again reduces capital, shrinks the number of jobs created and trims workers' wages.
* Expensing tax. For the last two years, businesses have been able to deduct the full cost of new capital expenditures from their income, which stimulated investment. Since this provision lapsed, the cost of capital is now higher, driving capital expenditures down and slowing job creation.
How many small businesses are really affected by these tax hikes? Analysis for the Federal Reserve Survey of Small Business Finances by George Haynes of Montana State University indicates that small-business families earning more than $250,000 per year employ 93 percent of those who work for small businesses. This means the vast majority of small businesses will be paying more in taxes, transferring more money to the federal government that otherwise could have been reinvested in their small businesses to benefit the company and its employees.
Therefore, for many small businesses, the "fiscal cliff" deal will hinder business growth and job creation at a time when both are sought and needed.
* Pamela Tumpap is president of the Maui Chamber of Commerce.