Winners Will Always Win

January 4, 2013

I’ve fielded numerous calls from concerned members regarding the implications of the pending fiscal cliff, how new regulations and tax increases impact growth and profits and the many troublesome business issues that are flooding the news.  I’d like to share my personal opinions on these issues.

First off, small businesses have been challenged by mandates, regulations and taxes for decades.  Like challenges from the past, smart business people will simply find new ways to be profitable.  Savvy business owners (with advice from tax and legal professionals) have always found legal methods to work around the challenges they face and eventually succeed.  The best systems integration firms in our industry along with thousands of small business owners in other marketplaces will find ways to be successful in 2013.

Here’s some of what I predict will happen…

  • Taxing the “wealthy” is going to happen whether we like it or not.  I also expect capital gain tax to go from 15% to 28%.  You need to plan for this and ask your accounting and legal advisers what “we” are doing to prepare.
  • The IRS will continue to challenge small businesses that use contract employees.  They will be attempting to get you to convert independent contractors to employees…and the states will be coming in right behind them.
  • It will become clear in 2013 what the impact and additional costs of the healthcare regulations (most kick in in 2014) will be for small business owners.  This will trigger a number of studies that will compare the cost of compliance to that of penalty tax and/or to the tax credits they might earn.  Some experts already believe that the penalty could be less expensive than the cost of compliance (depending on the current company/employee share).
  • From what we know so far, firms who choose to not offer insurance any insurance and have more than 50 employees, and have at least one employee receiving insurance subsidies, they must pay a tax of $2,000 per subsidized employee. The tax is applied to all employees (after excluding the first 30), not just those that are subsidized. For example a firm with 51 employees would pay $42,000 in new annual taxes, and an additional $2,000 tax for every new hire.  As insurance rates increase, this may actually be less expensive than what they would pay to purchase the insurance.
  • I expect many businesses with less than 50 employees will discontinue the practice of offering healthcare benefits to employees and instead increase wages to remain competitive.  The employees will purchase their coverage directly from the insurance exchanges. Companies who currently cover just the single plan will lead the way as the family plan mandate will add tremendous costs to them.
  • Once companies reach 49 employees, they will likely to turn to contractors and outsource work to evade the new mandate, even if such arrangements are less efficient than directly hiring new workers.  By 2014, businesses will grow to a ceiling of 49 employees, or trim back to 49 employees.  These businesses can avoid many of the mandates by staying small as growth will simply add new costs and burdens.
  • I can envision larger companies creating two separate and distinct corporations; one that houses the traditional exempt status employees, the other to house the non-exempt (installers, technicians) field and service- related employees.  The services company will then become the exclusive labor force provider for the other corporation.
  • I can see corporate tax increases fueling reinvestment back into the company vs. taking profits out.  But even if the corporate rates increase and unless loopholes get tightened up, the accounting world will undoubtedly outmaneuver any taxation plan created by the politicians.
  • Increasing taxes on the rich will only cause the rich to establish new investment vehicles and income reduction strategies.  Corporations will become owners of CEO homes, vehicles, etc.  Once again outmaneuvering the program designed by politicians.  The rich will live on modest incomes and the supplement that with the proceeds from asset sales.
  • I can see roll ups, mergers and acquisitions increasing.  Preserving wealth, the struggling economy, higher taxation and lack of available operating capital will cause some owners of smaller firms to seek a buyer.

The next few months (maybe few years) really will be filled with numerous changes to the way we administer our business.  More than ever, it will be important to be in the know and understand the changes happening and how you can best serve your company and its employees.  Communication will be the key throughout this whole process – making sure that employees are aware of changes and why they are happening. Open, honest dialogues will make the work environment that much easier.

NSCA will be providing information through regional events, on-line training or roundtables, and through my blog in addition to our policy blog (link to my blog).  We will be updating our Essentials of Systems Integration to reflect changing processes and procedures. Most importantly – pay attention, be a savvy business owner who will stay in business because you planned ahead.  Your association is committed to supporting your business needs and best interests.

Our fight isn’t about additional taxes for the rich.  Our fight is to prevent burdensome regulations for the risk-takers.  We are here to support you, the business owners – the risk-takers- our members, who have provided so many great jobs in this industry.

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