Mere threat of tax cliff already weighing heavily on small businesses


Should Congress fail to avoid the tax cliff looming at the end of the year, small business owners could feel the impact on various levels. (Bill O'Leary/WASHINGTON POST)
September 14, 2012

Small business owners, like so many Americans, are anxiously waiting to see whether Congress can avoid potentially catastrophic spending cuts and tax code revisions scheduled to take place at the end of the year. But already, just the threat of toppling over the tax cliff is weighing on their decisions and bottom lines.

In fact, perhaps more than any proposed avoidance maneuver, it’s the overwhelming sense of uncertainty surrounding the months ahead that has small businesses stuck in a holding pattern, discouraging them from hiring and delaying investments that could help them grow, according to several business owners who testified on the Hill on Thursday.

While most of their concerns centered on the pending expiration of the Bush-era tax cuts, particularly the fate of those cuts for high-income earners, one employer explained that tax changes could hit small business owners from a number of angles.

“Multi-year planning and the ability to predict or at least estimate business profits and taxes are critical in operating a business, and it’s important to know both the current and future tax rates,” Jeffrey Porter, owner of Porter & Associates in Huntington, W.V., told members of the House Small Business Committee, later adding that “unfortunately, the uncertainty is not limited to one or two provisions, but instead affects many areas of the internal revenue code.”

For example, Porter, whose firm provides tax planning services, emphasized the “on-again, off-again” nature of two important tax extenders — referred to as Section 179 deduction and bonus depreciation — which currently allow businesses to write off portions of their investments in software and equipment. Should Congress take no new action, Section 179 will be diminished and the bonus depreciation option will disappear altogether in 2013.

“These areas have a substantial impact on businesses, as the ability to write off a substantial capital expenditure at one time may determine whether a business owner purchases an asset this year, next year, or perhaps not at all,” he said.

Theresa Kern, owner of a construction company near Chicago, is facing precisely that dilemma. She has identified and plans to purchase a steel fabrication plant so her firm can provide the rebar that it already specializes in installing. However, the Section 179 write-off option is one of the critical tax provisions that “makes the project financially feasible,” according to her testimony.

But there’s no way her company can secure a loan from the Small Business Administration and close the deal before that provision expires on January 1; consequently, her accountant has recommended that she delay buying the plant until the tax picture comes into focus.

“So for now, I am forced to sit and wait while the economy sputters along and factory workers remain unemployed, because there is no productive tax policy in place that will give me the confidence I need to make this investment,” Kern wrote.

Porter added that looming changes could make filing tax returns more difficult and make buying and selling businesses far more complicated. But the heavyweight bout in the current tax dispute is still the one concerning the continuation of tax breaks families earning more than $250,000 a year.

Democrats have largely argued that the the cuts should be reserved for poor and middle-class Americans, citing research that only a small number of businesses would be hit with higher tax burdens if the top rates were allowed to rise in 2013. Republicans refute those claims, pointing to studies that show increasing taxes on the wealthy would penalize successful employers and eliminate hundreds of thousands of jobs in the years ahead.

Scott Hodge, president of the Tax Foundation, employed an alarming analogy to express his take on the impact of lifting the top rates.

“Unfortunately, there are many in Washington who say we shouldn’t worry about the economic impact of allowing these tax cuts to expire because only 2 percent of pass-through businesses will be impacted,” he said. “But I think this view is badly mistaken. I think it’s like saying we shouldn’t worry about the economic impact of cancer, because NIH tells us that only 0.5 percent of Americans will be diagnosed with cancer this year,” later adding that the debate shouldn’t be over how many businesses would be impacted, but rather how much business income would be affected by raising the top rates.

Either way, with no action expected before the elections, lawmakers are staring at a small window of time with which to steer clear of the universally feared fiscal cliff and — if small business owners have their way — provide long-term clarity with regards to the tax code.

Follow J.D. Harrison and On Small Business on Twitter.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he runs the On Small Business blog.
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