Using one of their last voting days prior to the summer break, the U.S. House of Representatives voted on August 1, 2012 to keep tax rates at their current level. Of course that’s just the beginning of a long fall season as the Senate resumes the debate and the presidential election looms. Like most things in politics, there’s no guarantee that you’ll see those cuts in reality. That means that small business owners need to plan carefully in anticipation of a potential restoration to the old tax rates including those on payroll taxes and the Bonus Depreciation for qualifying business purchases. Along with the Bush “fiscal cliff”, a term for a bundle of tax cuts set to expire on December 31, 2012 and new taxes scheduled to go into effect in 2013, there are a few other tax changes to consider as you start your financial planning for the 4th quarter of the year. Not only are there old taxes that are reverting back to their previously higher rates, but there are automatic spending cuts for military and domestic programs and a set of new taxes scheduled to begin in 2013 that will leave our wallets emptier. According to a recent survey by the U.S. Chambers of Commerce, “business owners are concerned about the impact of the ‘fiscal cliff’ and worried that Congress won’t act to prevent it.”
Unless the Bush-era tax rules are extended for another year, the highest ordinary tax rate would rise to 39.6 percent from 35 percent. Additionally, the special tax rates on capital gains and qualified dividends are set to expire. Depending on your income level the capital gains rates may increase from 15 to 23.8 percent in 2013. The 10 percent tax bracket is eliminated – the lowest bracket will be 15 percent. Another under-emphasized gem is that dividends will no longer qualify for capital gains rates – all will be taxed as ordinary income (max rate of 39.6 percent for 2013).
Without an extension of the tax cuts, the three most important tax changes for small business owners involve payroll, bonus depreciation and the Alternative Minimum Tax.
- Payroll taxes will go up. Effective January 1 2013, previous extensions that reduced tax rates from 6.2 percent to 4.2 percent will expire reverting the rate back to 6.2 percent. The change will cause an immediate ripple in small businesses due in no small part to the administrative work needed to implement the change and a large financial impact from the increase itself.
- End of the bonus depreciation on equipment purchases. Buying equipment in 2012 allows the business owner to deduct 50 percent of the purchase cost immediately rather than taking the deduction gradually over the life of the asset. If Congress doesn’t act, the immediate 50 percent deduction will go away making it more expensive for companies to invest in their business. If you’re thinking about making a large purchase, or even smaller office equipment, try to plan for it before the end of 2012 in order to take advantage of the tax break. Just remember that the bonus depreciation can only be taken on NEW equipment (nothing used and no software).
The section 179 deduction is still available for most new and used capital equipment and includes certain software. The limits were increased to $139,000 (the previous maximum allowance pre-2010 Tax Relief Act and Jobs Act of 2010 was only $25,000). Additionally, the limit on capital purchases was increased to $560,000. After 2012, the deduction reverts to $25,000 and the purchase limit to $200,000.
- Those dreaded three little letters, AMT, are back and taking an even bigger bite out of your wallet. The Alternative Minimum Tax, meant to be a tax for the super-wealthy, is now zeroing in on middle class America by targeting not just individuals of wealth. Basically, the tax strips away deductions and imposes a flat-tax of as much as 28 percent. Looking at the numbers, the tax targets taxable incomes over $150,000 to $2 million dollars. For small business owners who are struggling to grow their businesses, the adjusted figures will now capture an additional 31 million filers in 2012 leaving many more Americans face to face with a significantly larger tax bill, says the Joint Committee on Taxation.
There are many tax provisions that will be facing an uncertain future this fall. Misunderstanding the nuances of tax law can leave small business owners paying more tax than they thought. Before you buy or sell capital items, talk with a Fiducial Advisor by calling 866-Fiducial to learn what can be done to keep taxes to a minimum and how your small business can take best advantage of any remaining tax breaks.