While a number of critical topics fall under this generic topic, we will specifically look at taxes this week. Maybe you’ve heard of “taxmaggedon” or the “fiscal cliff,” common phrases used to describe the 2001/2003 tax cuts set to expire at the end of 2012 in addition to a series of spending cuts many in the defense industry are already dealing with.
Some of the key taxes affecting you and the impact they have include: Individual Income Tax Rates, State Tax, Capital Gains & Dividends, Section 179, Alternative Minimum Tax (AMT), and Social Security Payroll Tax.
1. Individual Income Tax Rates:
Issue: Rates for the middle class would witness a 3% increase and those making over $388,350 would have an increase of nearly 5% in 2013.
Impact: It is generally believed this specific tax will not be dealt with prior to the November elections and many Congressional candidates are addressing this as a need for a tax overhaul to be addressed in 2013. Congress has had a difficult time passing legitimate policy over the past several years and it’s critical to press your candidates on how they will address this issue. What is their plan? How will they work across party lines? How will they ensure something gets done in the next 3-6 months addressing these specific concerns? Less money in your paycheck means less money circulating in the economy in general. This could lead to restraints on hiring, offering competitive benefits and retaining employees.
2. State Tax:
Issue: Set to expire at the end of 2012, the current estate tax policy exemption is listed at $5,120,000 in 2012 with a tax rate of 35%. If this is not extended or changed, the new rates in 2013 will go back to the 2001/2002 rates of $1,000,000 and a tax rate of 55%.
Impact: Protecting your family for years to come is a driving factor for wanting a prosperous business. Understand the position of your candidate – some are requesting a full repeal of the estate tax, others are seeking a compromise in the amount and tax rate. For you, which one will put you in control of your money and protect your family for years to come?
3. Capital Gains & Dividends
Issue: The 2012 rate for long-term capital gain (one year or longer) stands at a 15% tax rate and would increase to 20% in 2013 for most taxpayers (there are some exemptions and no tax required in certain tax brackets). Additionally, dividend rates jump from 15% – 39.6% (excluding the 3.8% Medicare tax rate).
Impact: Some professionals recommend evaluating selling your business now if you are considering it in the next year or two. Depending on how you would receive the payout – a lump sum or paid out over time – and the uncertainty of what the new guidelines will be like, it is recommended you speak with your tax professional in order to determine the best move for you to make in 2012. This gives you a few a short months to make a major decision on your future. More importantly – no matter what happens, a 3.8% Medicare contribution tax will be added in 2013 on the lesser of the net investment income or the amount your adjusted gross income (AGI) exceeds $200/$250k for single/joint filings respectively. An even greater impact comes in your tax status – are you an LLC, an S Corporation, or a partnership? If so, again, you should consult your tax professional to determine your status.
4. Section 179
Issue: Section 179 of the tax code allows businesses the capability to deduct the full amount of the purchase price of equipment (certain limits apply) in a given year. This year, the total deduction amount is $139,000 (with a total amount of $560,000 of equipment purchased before reductions start to take effect in the amount you can deduct). Additionally, a 50% bonus depreciation is applied to the purchase on new equipment only after you’ve reached the $560k limit. Rates have varied greatly over the last 5-8 years, but no matter what this benefit is set to expire in 2012.
Impact: This very simple part of the tax code is a complete incentive for businesses to invest in themselves and keep up-to-date with new equipment often purchased for efficiency purposes. The 2013 deduction amount will be dramatically reduced to only $25,000. This benefit creates money-flow and is truly aimed to help small businesses. Will your candidate vote to extend this tax benefit to small businesses and even those that aren’t profitable in a given year?
5. Alternative Minimum Tax (AMT)
Issue: Originally thought to be more for high-income individuals, corporations, trusts etc… this tax actually is quite harmful to small business owners. The IRS states “the alternative minimum tax (AMT) attempts to ensure that an individual who benefits from certain exclusions, deductions, or credits pays at least a minimum amount of tax.” Because this tax was never indexed for inflation, 2013 will see a significant change in the base amount for taxation purposes. Currently, the tax starts at singles – $48,450 and joint files of $74,450. The 2013 rates would drop to singles – $33,750 and joint files – $45,000.
Impact: More and more small businesses making over $100k a year have become subjected to the AMT. Several steps can be taken to help reduce your AGI but more importantly your tax status can have a major impact on the effect of the AMT on your business due to investments. Some organizations are calling for a complete repeal of the AMT – and the fact of the matter is, more tax paying citizens will be paying more taxes next year due to the dramatic changes in the application of this tax code on income and capital gains.
6. Social Security Payroll Tax
Issue: The employee owed social security payroll tax will revert from 4.2% to 6.2% in 2013
Impact: Simply stated – less money in your paycheck.
With more than $500 billion in additional tax burdens set to take place in 2013 for small businesses, it is important to understand that there are many more tax implications than just these six identified here. What are your political candidates doing to protect your business and help the economy return to a successful and sustainable culture for years to come? Understand the ins and out of what these taxes can do to your business and more importantly, speak to your tax professionals to ensure you are protected and increasing your bottom line.