Photo courtesy StockMonkeys.com
WASHINGTON — While most of us were celebrating the New Year this past Tuesday, Congress was making up for lost time in reaching a federal budget deal to avert automatic, across-the-board tax increases and budget cuts, a.k.a. the "fiscal cliff".
The newly enacted legislation preserves most of the Bush-era tax cuts, which were the result of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.
While the legislation does target the wealthiest Americans with higher taxes, it permanently extends some of the Bush-era tax cuts and permanently “patches” the alternative minimum tax (AMT). It temporarily extends many other tax provisions that had lapsed at midnight on Dec. 31, as well as others that had expired a year earlier. The legislation did not address the temporary lower rate (4.2%) for the employee portion of the Social Security payroll tax. The tax has now reverted to 6.2%; most employees will experience the equivalent of a 2% pay cut with their first January paycheck. It is important to check your payroll system to ensure that you are deducting the proper amount for Social Security (FICA).
Let’s take a glance at a variety of financial factors in store for small businesses in 2013:
Individual tax rates — Although the existing marginal tax rates are maintained, a new top rate of 39.6% is imposed on taxable income in excess of $400,000 and $450,000 for married taxpayers filing jointly.
Personal exemptions and itemized deductions — A phase-out is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.
Capital gains and dividends — Thesewill be taxed at a new 20% rate for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets. Although this is not as bad as was expected, it may increase the tax burden on the sale of a security or systems integration company. There may be some opportunities for sales with gross prices of less than $2 million.
Exemption amount for the alternative minimum tax (AMT) — The AMTon individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. While most business owners will still be subject to the AMT, the fact that the thresholds are now indexed may prevent many mid income business owners from being subject to the AMT.
The estate and gift tax exclusion — The amount is retained at $5 million and indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent. This may make it possible to keep the majority of small to midsized security and systems integration companies “in the family.”
The legislation that allowed the United States to avoid the “fiscal cliff” also extends many business tax credits and other provisions. The increased expensing amounts under Sec. 179 are extended through 2013. The availability of an additional 50% first-year bonus depreciation (Sec. 168(k)) was also extended for one year. It now generally applies to property placed in service before Jan. 1, 2014 (Jan. 1, 2015, for certain property with longer production periods). The legislation also keeps in place the reduced S-Corp. recognition period for built-in gains tax. This is a huge benefit for former C corporations that have elected S-Corp. status more than five, but less than 10, years ago.
Though too numerous to mention here, the legislation also contains numerous credits and benefits, including for electric and alternative fuel vehicles. Many business owners will notice that some Medicare rates will increase and the amount that employers can allow employees to contribute to prepaid medical expense plans will decrease from $5,000 to $2,500. Certain other changes related to the National Health Insurance plan will also take place this year. These may surprise many employers and employees alike.
Mitch Reitman is Managing Principal of Fort Worth, Texas-based S.I.C. Consulting, which provides financial services to security alarm companies in 23 states and Canada. He can be contacted at (817) 698-9999.