Congress stopped the country from going over the so-called “fiscal cliff” — and that’s great news for some small business owners. But with a deal that doesn’t immediately address federal budget cuts, for many, the uncertainty drags on.
The compromise bill that passed the House late Tuesday raises taxes on couples earnings $450,000 or more and individuals earning at least $400,000. That affects small company owners who report their companies’ income on their personal 1040 returns. Democrats and small business lobbying groups had estimated that just 5 percent of owners would have paid higher taxes under President Obama’s proposal to raise rates on couples earning $250,000 or more, and individuals earning at least $200,000. The number of owners who will pay higher taxes now is likely to be even less than those estimates.
“That will help out tremendously,” says Nate Nelson, who owns a medical testing company, Frontera Strategies, based in Dallas. He sets aside money to pay his taxes, and the higher threshold means he may have more cash available to make two hires and $80,000 in equipment purchases he’s been putting off.
“It will help us loosen the belt a little,” Nelson says.
The bill avoids widespread tax increases, but delays deep spending cut decisions for two months.
Companies that benefit from government contracts — whether they work directly for the government or do business with companies that contract with the government — still don’t know how they might be affected by cuts in defense and other federal programs. Without the cliff compromise, the Pentagon and numerous federal agencies would have been subject to billions in budget cuts as early as this month. Cuts are still expected but it’s unclear where, or how much, they will be.
Kaney Aerospace, an engineering services company in Rockford, Ill., does business with federal contractors. If the government cuts their business, owner Jeff Kaney expects his company to be affected. He’s not sure yet what the impact will be on his business.
Nelson shares some of Kaney’s concern. He’s worried that the budget debate could result in a reduction in Medicare reimbursements on the medical tests he provides. “It could have a detrimental effect on our business,” he says.
The unknowns will lead owners to keep running their businesses conservatively, says Dennis Ceru, an adjunct professor of entrepreneurship at Babson College in Wellesley, Mass.
“The concern I see is expressed in the form of not signing longer-term leases, looking to defer expensive equipment expenditures, looking to defer hiring and using seasonal and part-time workers instead of full-time ones,” he says.
Compounding owners’ concerns are the weakness in the economy and the government’s inability to come up with solutions to its budget problems, says Scott Meadow, a professor of entrepreneurship at the University of Chicago’s Booth School of Business.
“All of those things are kind of the foundation of this anxiety that’s out there — when is the sword going to fall, what is the effect going to be,” he says. “It’s that anxiety that causes (a small business owner) to slow down.”
That means 2013 is likely to look a lot like 2012 for small businesses, says Kathleen Allen, a professor of entrepreneurship at the University of Southern California Marshall School of Business.
“I don’t think that this kind of uncertainty and volatility is going to change anytime soon,” she says.
Some other important issues for small businesses related to the fiscal cliff deal:
Business tax breaks survive: Owners contemplating equipment purchases got some help. The bill maintains what’s known as the Section 179 deduction, which allows small businesses to deduct rather than depreciate the cost of many types of equipment, at $500,000 for 2013. It was scheduled to fall to $25,000.
Bonus depreciation extended: This allows businesses to deduct 50 percent of the cost of equipment or real estate. It gives them a quicker tax break than the tax code’s standard depreciation schedules, which require that the cost of property be depreciated over the course of a few years or decades, depending on the type of property.
Payroll taxes and jobless benefit extensions: The end to the 2-percentage-point cut in the Social Security payroll tax is worrisome for many owners. The payroll tax cut, first enacted two years to encourage people to spend, will be allowed to lapse. A worker earning $50,000, for example, will now have $1,000 less in take-home pay. Workers will start feeling the pinch as soon as the first paychecks of 2013 are issued. Many people will respond by cutting back on discretionary spending and that’s bound to hurt many small businesses.
“Think about the person who runs the local sandwich shop, the coffee shop, the local business person … they’ll feel it more,” says Ceru, the adjunct professor at Babson.
On the flipside, the bill extends long-term jobless benefits, keeping money in the pockets of many people who are actively seeking work for another year.