By Jody Padar and Jason Lawhorn
Congress’s extension of the debt ceiling coupled with the outcome of the fiscal cliff (part one) has consumers and small business owners worried about the nation’s—and their own—financial stability. To help, Xero cloud accounting software’s panel of experts are providing “Fiscal Cliff Notes” to help small business owners understand what Congress’s action (or inaction) means to them.
The Good: The Alternative Minimum Tax (AMT) relief, and extended Bonus Depreciation and Section 179 deductions. The AMT was created to tax high-wage earners, corporations, estates and trusts. At its advent, middle class and solo workers were exempt up to earnings of $45,000. But the bill did not account for inflation and wages have definitely increased since 1969 when the bill was first introduced. Had the relief law not been passed a significant number of middle income taxpayers would have been subject to the Alternative Minimum Tax, which is substantially higher than the exemption from regular income tax.
Congress also extended the Bonus Depreciation and Section 179 deductions, which allow SMBs to recover the cost of investing in new infrastructure and property. The deductions will continue to stimulate spending, support SMBs, and encourage economic growth. At present, Congress says the approved AMT relief and tax deductions are permanent fixes. Word of caution though: no fix is ever permanent with the tax code.
The Bad: If your small business is defined as an LLC you will see a 3.8 percent tax on your earned income as part of the healthcare bill beginning this year. One way to mitigate this is to change your status from an LLC to an S-Corp and now is the time to do it. If you change you status before March 15 this will apply for 2013, whereas if you change after the cut-off date you will not be eligible until 2014.
The Ugly: A misnomer is that the $450,000 tax increase is on the “rich” and independently wealthy, but this is not the case. S-Corps and LLCs are in the same tax pool as individuals. Additionally, most of the $450,000 earners are small business owners. Your average person is not making this type of salary, and the small business owners that are use this as “flow-through” money, i.e. they reinvest this capital back into their businesses. However, because of their tax designation (S-Corp, LLC) they fall into this bracket and their taxes will be increased.
The Solution: The main thing to be aware of is the complexity of the law changes. SMBs really need to get professional help. Finances are already complicated, and dealing with undecided government regulations can feel like driving in a blizzard, so find an accountant you like working with and ask them to assist you with forecasting, “what if” scenarios, and your business’ financial health. Work with them all year, not just at tax time, and know that there are always changes happening with tax law and filings. If you read or see something that does not make sense, contact your accountant. Sticking your head in the sand when it comes to your finances is as good as leaving the cash drawer open while you’re out.
Jody Padar is CEO and principal of New Vision CPA Group and Xero Bronze Partner. Jason Lawhorn is President and CEO of Lawhorn CPA Group, Inc. and Xero Silver Partner.