Lawmakers in January struck a deal that temporarily avoided America’s so-called “fiscal cliff,” which would have resulted in significant tax increases for small businesses across the board.
The deal was approved by congress Jan. 1, and by President Barack Obama later in the month.
The agreement, called the American Taxpayer Relief Act (ATRA), is far from admired by all, and is only a partial deal—some items of the fiscal cliff were delayed for decision until this month. Still, several approved tax items removed immediate drags on small business confidence in the U.S.
Several tax issues supported by the Automotive Service Association (ASA) were set to expire at the end of 2012. If those items were not extended, small business owners would have experienced dramatic tax increases this year.
“We had a variety of tax extenders that needed to happen for small businesses, including auto repairers, in order to prevent taxes from dramatically increasing,” says Bob Redding, ASA’s Washington, D.C., representative.
Although the ATRA does still pose a few tax increases, a majority of small repair operations will not be affected, and mid- to large-sized operations will experience less negative impact compared to what could have been had no deal been passed.
Redding highlights the main tax components of the approved deal important to the small business community:
Issue: Estate Taxes
Current law: A permanent extension of existing law was made. The estate tax exemption will remain at $5 million per household. Individuals with up to $400,000 of annual income will remain in the 25–28 percent tax bracket and married couples with a combined income up to $450,000 will stay in the 33 percent tax bracket. The tax rate goes up for people above those income levels.
Impact: This prevented the estate tax exemption from moving from $5 million to $1 million per household, and prevented the maximum tax rate from increasing to 55 percent.
Issue: Capital Gains Taxes
Current law: Capital gains tax rates will remain at 15 percent for individuals with up to $400,000 of income ($450,000 for married couples). All income levels above that will experience a tax-rate increase to 20 percent.
Impact: This prevented the top capital gains tax rate from increasing for all income levels in 2013.
Issue: Individual Income Taxes
Current law: There was a permanent extension of current law. Individual income levels up to $400,000 will remain in the 25-28 percent tax bracket, and married couples with a combined income of up to $450,000 will remain in the 33 percent bracket. There are tax increases for all income levels beyond that.
Impact: This prevented individual income taxes from increasing up to 39.6 percent in 2013.
Issue: Small Business Expensing
Current law: The current law was extended. Businesses still can expense up to $125,000 of purchased assets.
Impact: This prevented the maximum amount falling to $25,000.
Issue: Bonus Depreciation
Current law: There was a one-year extension of up to 50 percent bonus depreciation through 2014.
Impact: This prevented the additional 50 percent bonus depreciation from expiring at the end of 2012.
Issue: Payroll Taxes
Current law: 2012 payroll tax rates were not extended.
Impact: Payroll tax rates will increase across the board.
Issue: Medicare Taxes
Current law: Medicare taxes increased for individuals with annual incomes higher than $200,000 ($250,000 for married couples).
Impact: For people above those income levels, Medicare taxes on wages increased .9 percent, and taxes on investment income increased 3.8 percent. The deduction for medical expenses increased from 7.5 percent to 10 percent of income. Only expenses above 10 percent of an individual’s income will
be deductible.
