If you tune into the Republican National Convention tonight, you’ll likely hear a call to reduce taxes — something we all might like to see happen. Will it? Perhaps. But there are potential tax increases that aren’t getting much attention.
The media focus today, of course, is all about the “Bush-era tax cuts” and their expiration at the end of the year. If allowed to happen, virtually every taxpayer will see a 3 percent increase on most rates in 2013. The highest earners (individuals topping $388,350) will face a 4.6 percent increase, up from 35 percent to 39.6 percent. Little wonder the U.S. Chamber of Commerce reports the major concern being raised by the overwhelming majority of small businesses is that Congress will fail to act to prevent it from happening.
Not getting any news coverage, however, are other tax changes that will impact us as small-business owners. For example, the extension of the payroll tax holiday that President Obama signed will end this year. It will take congressional action to avoid seeing employee payroll taxes rise from 4.2 percent to 6.2 percent. That’s for traditional employers paying half the payroll taxes on behalf of their employees. However, the 2 percent really doubles to a 4 percent tax hike for any small-business owner who pays the self-employment tax because, if that’s you, you have to pay both the employer and employee portions. Either way, it will hit small business owners on Jan. 1, just four months from now.
Another tax being ignored is the Alternative Minimum Tax. The AMT was created to make it mandatory that “the rich” pay taxes even if they have reduced their tax bill with myriad available deductions. However, the AMT also directly impacts S corporations, partnerships and LLCs. What it does is take away a lot of deductions and imposes a tax of either 26 percent or 28 percent — whichever is greater.
The AMT, as a practical matter, is about to hit taxpayers earning about $150,000 and up. That’s because one of the huge problems with the AMT is that the threshold has not been adjusted for inflation. The reality, according to the Joint Committee on Taxation, is the AMT will hit 31 million taxpayers in 2012.
Finally, how about the enhanced tax deduction for the acquisition of business equipment? Essentially, it’s currently helping small businesses purchase equipment by allowing an immediate tax deduction of 50 percent of the equipment cost and it counts as depreciation. But, on Jan. 1, this accelerated depreciation will end and go back to the traditional formula that limits businesses to deducting the cost of the equipment over its usable lifespan, usually seven to 10 years. Accordingly, it might be best to buy needed equipment this year given the possible end to this tax provision.
Talk about uncertainty. It’s not just a problem for small-business owners trying to predict the future for possible growth and expansion. Clearly, this kind of unknown also affects consumers considering big-ticket purchases. While we’re not in control of the consumer’s response to such uncertainty, right now as businessmen, we should be developing possible responses and actions to be taken depending on what happens, or doesn’t happen, in the next four months. It will avoid both surprises as well as regretting missed opportunities later.