With Treasury Secretary Timothy Geitner meeting to discuss the fiscal cliff today with lawmakers, many are worried that a compromise won’t be reached and that the United States will go over the cliff, plunging the country into a second recession — or worse. Entrepreneurs and small business owners are likely to be hit hard by the fiscal cliff, which makes finding a compromise even more important, said experts.
“Small business owners are most worried about the impact of tax increases on their employees and customers. A 2 percent payroll tax cut Obama negotiated with Congress in 2010 when the Bush-era tax cuts were extended is due to expire, ending what amounts to a $1,000 income boost to many middle class taxpayers,” said Billy Morrissey, president of Merchant Solutions Group. “If Congress doesn’t act, these increases will make it difficult for small, family businesses and entrepreneurs to hire new employees, potentially hindering growth and expansion.”
The fiscal cliff will not be good for entrepreneurs and small business owners. Companies are going to prepare themselves for the worst, which means less hiring, fewer new products, less marketing and fewer capital equipment purchases. The belt-tightening can easily send the country back into a recession and increase unemployment rates, said Robert Holland, chairman and CEO of consultancy Vistage Michigan.
“This is the time for Congress and the Federal Government to act for a definition of what will happen with the US Tax structure and funding for Healthcare. Otherwise, we will face more slowdown in the economy and a retraction that will be more strongly felt in the last half of 2013 and through 2014,” Holland said.
However, despite the impending tax increases, and not just from the expiring Bush-era tax cuts but from the implementation of the Patient Protection and Affordable Care Act (PPACA, also known as Obamacare), there are a few things entrepreneurs and small business owners can do to give themselves a parachute if we plummet over the fiscal cliff. Said CPA and CEO of online financial services marketplace BIDaWIZ Ryan Himmel:
“Capital Equipment Purchases/Section 179 — Businesses that were on the fence about whether or not they were going to make capital equipment and Section 179 purchases now have a good reason to move forward in 2012 as opposed to waiting until 2013. The Section 179 deduction goes from $139,000 now to $25,000 in 2013. In addition, bonus depreciation is now 50 percent of the purchase and is set to expire all together in 2013. We’re not holding out breath for either of these business tax breaks to be reinstated in 2013 to 2012 levels.
“Higher Taxes in 2013 Means C Corporations Should Issue Special Dividends Now — Obama has pledged that he would support extending the Bush-era tax cuts for joint filers earning less than $250,000 a year. However, he would allow those cuts to expire for those earning over $250,000 annually and with investment income — likely many small business owners. While the
Republican-controlled House of Representatives will fight for lower taxes for all, we do believe there will be some compromise. Still, the 43.4 percent tax rate for high income earners, which includes the 3.8% investment income surtax, and those with dividend income is likely for 2013. If you control a C Corporation with positive free cash flow, it would be advisable to issue a special dividend in 2012, which will be taxed at 15 percent, as opposed to 43.4 percent in 2013 for high income earners.”