How the ‘fiscal cliff’ compromise affects small businesses…

Posted on January 15, 2013. Filed under: Ryan Johanek |

On New Year’s Day Congress approved a stop-gap measure to raise rates on the wealthy, extend unemployment benefits, and avoid a round of tax increases and government spending cuts.  Whether you are for or against the legislation that was passed to avoid the fiscal cliff; small business owners will be affected by the changes.  Here are a few measures that will have the greatest impact on small businesses. 

Top rates raised: Tax rates will permanently increase for families with income above $450,000 and individuals above $400,000.  Small business owners with pass-through income above those thresholds will pay higher taxes. The Bush-era cuts remain in place for the rest of the tax brackets.

Section 179 continued: Congress renewed the maximum deduction levels for bonus depreciation and Section 179 for another year, which gives tax breaks to businesses that purchase or lease software and equipment.

Capital gains rates increased:  Capital gains and dividends rates did increase to 20 percent for high-income earners, which entre­pre­neur­ship advocates fear could deter some investments in new and growing firms.

Payroll taxes increased: Lawmakers did not save the payroll tax cuts, instead allowing rates to jump back up to 6.2 percent from 4.2 percent for all Americans. Economists warned the move could cripple consumer spending which is a bad sign for small business. 

More targeted breaks continued: The Work Opportunity Tax Credit (WOTC), a tax incentive for firms that hire widely underemployed groups like youths and veterans, as well as breaks for renewable energy technologies and retail/restaurant improvements were extended through 2013.

R&D credit continued: The Research and Development (R&D) tax credit was extended for another year and reinstated retroactively for 2012.  Employers can now continue to get tax breaks for between roughly 6 percent and 14 percent of their R&D expenditures.


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