Relief Act Changes Taxes for Small Businesses

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The U.S. American Taxpayer Relief Act approved by Congress January 1 contains provisions with important implications for businesses large and small. In this roundup, we examine some of the most important elements your company may need to consider.

Business Tax

Depending upon the type of business you operate, a number of extensions have been included in the new Act. Among the more general ones applicable to many businesses are the extension and modification of bonus depreciation, the extension of increased expensing limitations, the extension of the kinds of property eligible for depreciation under section 179 of the Internal Revenue Code, and the extension and modification of the research credit.

A gaggle of other extensions are included for individual tax, business tax, energy tax, unemployment, medicare and health. Read some other business-specific extensions established by the Act here.

Personal Tax

Numerous personal tax provisions are also outlined in the new Act according to Jim Forbes, CPA Principal for business and financial advisory firm Skoda Miotti, who issued a special summary Wednesday. While an original proposal prescribed tax increases for individuals making more than $200,000 a year and for households bringing in $250,000 a year, the new Act compromises on this original point. The increases are especially relevant for small business owners who report their revenue as individual income.

Rate Changes. Taxes are still increasing for the nation’s highest earners. Essentially this could include small business owners who may now need to fork over more money in taxes rather than reinvesting that money in growing their businesses. While taxes for individuals paying at the 10, 15, 25, 28, 33, and 35 percent rate will remain unchanged, a new 39.6 percent rate now applies to joint filers and surviving spouses making more than $450,000, heads of households making more than $425,000, single filers making more than $400,000, and married couples filing separately who make more than $225,000.

Capital Gains and Dividend Earnings. Taxes on capital gains, including profit realized on the successful sale of a business or on dividends for investors will also be increasing for some earners. The new Act permanently raises the tax rate to 20 percent for individuals with incomes exceeding $400,000 or married filers exceeding $450,000. That tax rate rises to 23.8 percent after adding a Medicare surtax on investment income.

Estate and gift tax. Potentially important for family owned businesses, rates will be raised, but only at the upper end of the spectrum. The Act permanently boosts the top estate, gift, and generation-skipping-transfer (GST) rate from 35 to 40 percent for individuals dying and gifts given after 2012, and sets the exemption above which that tax must be paid at $5 million.

Other Important Provisions

Some other provisions of the Act may be of importance to small business owners and entrepreneurs. For example:

  • Alternative minimum tax relief. The act permanently increases the exemption rate for the Alternative Minimum Tax to $50,600 for unmarried taxpayers, $78,750 for joint filers, and $39,375 for married couples filing separately.
  • Personal Exemption Phaseout reinstated. In addition, the Act reduces the total amount of exemptions taxpayers can claim by 2 percent for every $2,500 of adjusted gross income earned over $300,000 for joint filers or a surviving spouse; $275,000 for heads of a household; $250,000 for single filers; and $150,000 for married couples filing separately.
  • Limits on itemized deductions. The Act also reduces itemized deductions by 3 percent of the amount by which each taxpayer’s adjusted gross income exceeds the thresholds established under the personal exemption phaseout.

Reaction

Reaction to the new Act from the business community has been mixed. However, National Federation of Independent Business CEO Dan Danner seemed to greet the news with some relief, at least as far as small business taxes are concerned, in a brief statement yesterday.

“It’s hugely disappointing to the small-business community that the legislative bridge to avert the ‘cliff’ did not address our country’s most pressing economic issue: unchecked spending that leads to crushing deficits and debt. Small business owners need to balance their books to stay in business and they think the federal government should do the same—no more excuses,” Danner said. “That said, there were some positives for small business on a few of the specifics in this deal. A substantial majority of small firms will be permanently spared a tax increase on their income and their estates, and certainty on the individual rates will help small-business owners with planning and cash flow. The mystery of what their tax rates will be is finally over, and there is relief in that, but there is much more work to be done to address spending and out-of-control deficits.”

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