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A Small-Business Guide to the Fiscal Cliff: 2013 Edition

Fiscal Cliff 2013Seems like we’ve been hearing about the fiscal cliff forever, now, and with March 1 comes the latest iteration: sequestration. What does this mean for small businesses, and what can owners do to help mitigate the impact of what’s already been done?

Let’s look at a rundown of what’s next on the line, but also some fresh strategies for grappling with what U.S. lawmaking has so far left it in its fiscal wake.

Fiscal Cliff 2013: Sequestration

So, yes, the fiscal cliff — at least a version of it — looms anew, with this March representing another crucial turning point. The newest round of wrangling has to do with sequestration — the ways that the federal government may (indiscriminately) cut into $85 billion worth of spending, programs, and services.

Experts say that if the sequester locks in, small business may very well feel the impact.

Here’s what Stephen Fuller, professor at George Mason University’s School of Public Policy told a House committee about his predictions on the matter, last fall.

“The size and specialized nature of small businesses make them more vulnerable to sequestration than large businesses,” Fuller said. “As a result, small businesses will  bear a disproportional impact of the federal spending reductions under  sequestration. While these impacts can be measured in the loss of jobs by small businesses that are prime federal contractors (34.1% of all prime federal contractor job losses), small businesses that are subcontractors, suppliers and vendors and  whose existence depend on consumer spending that would be negatively impacted by the losses of labor income resulting from sequestration, would account for 57  percent of the associated job losses across the country.”

This is why small-business owners watch for the outcome of the March 1 sequester deadline with weariness.

The Story So Far: What SMBs Can Do (Right Now)

In an effort to show a path through what may be some already difficult territory — into the next 9–10 months and beyond — accounting-software experts at Xero put their heads together with Jody Padar, CEO and principle of New Vision CPA Group, and Jason Lawhorn, of Lawhorn CPA Group, Inc.

Together, they’ve broken out helpful tips and notes about the state of affairs for SMBs, right now. Here are some fundamentals, and what owners can do to protect themselves. They’ve categorized their main points as good, bad, and ugly, regarding what’s happened in the fiscal-cliff scenario, so far.

The Good:

– The Alternative Minimum Tax (AMT) relief, and extended Bonus Depreciation and Section 179 deductions. The AMT was created to tax high-wage earners, corporations, estates and trusts. At its advent, middle class and solo workers were exempt up to earnings of $45,000. But the bill did not account for inflation and wages have definitely increased since 1969 when the bill was first introduced. Had the relief law not been passed, a significant number of middle income taxpayers would have been subject to the Alternative Minimum Tax which is substantially higher than the exemption from regular income tax.

– Congress also extended the Bonus Depreciation and Section 179 deductions, which allow SMBs to recover the cost of investing in new infrastructure and property. The deductions will continue to stimulate spending, support SMBs, and encourage economic growth. At present, Congress says the approved AMT relief and tax deductions are permanent fixes. Word of caution though, say Padar and Lawhorn, no fix is ever permanent with the tax code.

The Bad:

If your small business is defined as an LLC you will see a 3.8 percent tax on your earned income as part of the Healthcare bill beginning this year. One way to mitigate this is to change your status from an LLC to an S-Corp. Here’s the key to the timeframe: if you change you status before March 15 this will apply for 2013, whereas if you change after the cut-off date you will not be eligible until 2014.

The Ugly:

A misnomer is that the the $450,000 tax increase is on the “rich” and independently wealthy, but this is not the case. S-Corps and LLCs are in the same tax pool as individuals. Additionally, most of the $450,000 earners are small business owners. Your average person is not making this type of salary, suggest Padar and Lawhorn, and the small business owners that are may be using this as “flow-through” money — that is, reinvesting this capital back into their businesses. However, because of their tax designation (S-Corp, LLC) they still fall into this bracket and their taxes will be increased.

What to Do: 2013 and the Next Steps

The main thing to be aware of is the complexity of the law changes.

For small-business owners, finances are already complicated. Padar and Lawhorn said that dealing with undecided government regulations can feel like driving in a blizzard. They recommend (of course), that owners secure the services of a qualified accountant. And the idea is to work with that accountant to navigate the new landscape all year long, not just at tax time.

“If you read or see something that does not make sense, contact your accountant,” they said. “Sticking your head in the sand when it comes to your finances is as good as leaving the cash drawer open while you’re out.”

 

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