Volatility has definitely defined the last few months — fiscal cliff debates, new legislation, and the pending tax season have all taken their toll. While this news has left many weary, the instability has especially shaken small business owners, and as they send in their tax returns, many are wondering how all of this friction will impact their tax burden.
According to the latest report released by the National Federation of Independent Business Owners, the political climate and economic conditions remain the top reason that small business owners have chosen to forgo expansion. Taxes and regulations also remain the top two primary issues concerning small business owners.
On a bright note, the Small Business Administration reported that 97% of small businesses would not see their income taxes go up in 2013, but there are still certain changes that small business owners should be aware of. First, the ATRA did extend a few deductions that could impact 2012 and 2013 returns.
The limit for Section 179 deductions was increased to $500,000 back in 2010, but was set to fall to $139,000 in 2012. The ATRA bumped the limit back up to $500k through 2013, retroactively increasing the 2012 limit. Section 179 essentially helps small businesses invest in crucial, but typically very expensive, equipment and software. So any small business that chose to expand in 2012, or is looking to expand in 2013, will be able to deduct quite a bit from their taxes.
Along with Section 179 deductions, the ATRA extended the Research and Experimentation tax credit, which originally expired in 2011, through 2013. Businesses that have spent time and money prototyping or researching business components using hard sciences like engineering or physics can then continue to deduct 14-20% of qualified spending, depending on how they calculate their tax credit.
There are other pieces of legislation that have either been extended, or have provisions set to go into effect in 2013. Back in 2010, President Obama signed the Small Business Jobs Act and effectively lowered the tax rate on capital gains earned through the sale of certain small business stocks to 0 percent, as long as the stock is held for at least five years.
Originally only applicable to investments made between September and December of 2010, the provision was extended through 2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The ATRA once again extended this provision, covering qualified investments made in 2012 and 2013.
C-Corporations are the only business entity authorized to issue stock that qualifies for this rate, but small businesses that elected the C-Corp structure in order to raise money through investment will clearly benefit from this extension. As there is no guarantee Congress will extend this provision again, more investors will be looking to acquire small business stock in 2013.
Finally, Section 10906 of the Patient Protection and Affordable Care Act, which was passed back in 2010, will begin affecting payroll withholdings for high-earners. Employers must withhold an extra .9% on any income above $200,000 for single filers, or $250,000 for married filers. This increase also applies to income earned through self-employment, however there is no employer matching required for the extra .9%. It should also be noted that only a few companies will have to be concerned about this tax increase as most small businesses simply do not have anyone on staff earning that much money.
When facing slumping sales, an uncertain economy, and a typically gridlocked political system, it is understandable that many small business owners choose to forgo expansion. But despite the confusion, 2013 is still, at least from a legislative standpoint, an excellent year to expand for business. With section 179 deductions extended, the research and experimentation credit renewed, and a 0% tax rate on capital gains for qualifying stock purchases, a small business could save a lot of money if it chose to expand this year.
As always it is best to meet with an accountant or other financial professional before making any major decisions, but despite the volatility of late 2012 and early 2013, this year could prove to be a real boon for small businesses.
Deborah Sweeney is the CEO of MyCorporation, an online filing services company that specializes in incorporations and LLCs.