Small Business: 'Cliff's' tax changes
The "fiscal cliff" has been averted, but with the deal comes some tax changes for small businesses this year.
For some entrepreneurs, it could bring welcome extended breaks, and for others, particularly high earners, it could mean a hit to their bottom lines, experts said.
"There were some good business-related breaks extended, but despite the claims from Washington that tax rates have been saved, many business owners may find they're paying higher taxes," said Barbara Weltman, author of "J.K. Lasser's Small Business Taxes 2013" (Wiley; $19.95) and a Millwood, N.Y., small-business tax specialist.
This is due not only to changes under the fiscal cliff deal but also to the start of some taxes created by the Patient Protection and Affordable Care Act, Weltman said.
Added Medicare tax. Among those created by the so-called Obamacare legislation is an additional 0.9 percent Medicare tax starting this year on earned income in excess of $250,000 for joint filers and $200,000 for individuals, she said. That's an increase to 2.35 percent for earnings over the threshold.
Rate jump for profits. Under the fiscal cliff deal, if you're a sole proprietor or own a pass-through business such as a limited liability company or an S-corporation, meaning you pay taxes on your share of business profits on your personal tax returns, you'll see your tax rate jump from 35 percent in 2012 to 39.6 percent this year if your taxable income exceeds $400,000 for an individual and $450,000 for joint filers, Weltman said.
"Most small business owners pay taxes on their share of the business profits on their personal returns," she said.
Still, the tax increases on high earners didn't upset Ira Rosenfeld, a partner at Bi-County Scale & Equipment Llc in West Babylon, as much as the payroll tax break's not being extended for employees.
"It hurts . . . [employees] tremendously," said Rosenfeld, whose business sells and services food equipment for supermarkets and meat markets.
For 2011 and 2012, the employee share of the payroll tax supporting Social Security was temporarily reduced from 6.2 percent to 4.2 percent. This break wasn't extended for 2013. For those making $50,000 a year, that's about $1,000 less in their pockets.
Rosenfeld held an employee meeting in December about the likelihood the tax cut would not be extended and decided to give all 20 employees a minimum of $40 a week in raises to help cover the hit they'll take.
"These people are what make my company," he said.
Some breaks to continue. On the flip side, he said, he was happy to see bonus depreciation extended, which he said will encourage customers to buy equipment.
A 50 percent deduction for bonus depreciation up front on eligible new equipment was set to expire on Dec. 31 but was extended into the new year, said Jeff Cohen, a tax partner at Grassi & Co., a Jericho-based accounting firm.
Also, first-year expensing -- the Section 179 deduction -- of new or used equipment was slated to be reduced to $139,000 in 2012 from $500,000 in 2011 and drop to $25,000 in 2013, Cohen said. Instead, the $500,000 limit was extended for 2013 and made retroactive for 2012, he said. Certain limitations apply, so businesses may want to consult an accountant.
Other noteworthy extensions, according to Cohen:
15-year depreciation on qualified leasehold and retail improvements, rather than 39 years;
Work Opportunity Tax Credit of $2,400 to $9,600 for hiring targeted groups such as veterans;
Research and development credit, resulting in a 6.5 percent tax credit, on average, for qualified companies. Businesses with gross receipts of less than $50 million can use the credit to offset the alternative minimum tax.
Save the dateEmployers should start using the revised income-tax withholding tables and correct the amount of Social Security tax withheld in workers' pay ASAP -- but not later than Feb. 15.