The big problem for small businesses planning for tax changes in 2013 is that almost everyone doesn’t really know what will happen until January 2013. Congress and the President struck a budget deal in 2012 that essentially imposed spending cuts and tax hikes that take effect in 2013 if they can’t come to a better deal legislatively. In addition, the tax cuts from President George W. Bush also expire in January. So for many, if nothing is done, 2013 represents a major set of tax changes, including impacts on small businesses.
Sole Proprietors and Schedule C
Many micro-businesses and small businesses are owned by one person and the related taxes are declared as a Schedule C business on the owner’s personal income tax returns. That in turn causes the businesses net taxable income to become part of the owner’s personal, taxable income.
The Bush era tax cuts, mentioned above, were time-limited, but they created significant savings for personal tax return filers. This included lower tax brackets on personal income as well adjustments of the alternative minimum tax to avoid its dreaded hit on the average income earner. So just by doing nothing, Congress and the President in 2013 can essentially allow a tax increase on personal income, jumping from 35% to 39.6% on income earners over $200,000 and $250,000 if married. For those owning a business, it’s very likely that they would be hit by this tax increase, especially given the partisan positions in Washington D.C. at the end of 2012.
Foreign Account Impacts
Given the flexibility of the Internet, many small businesses are doing and earning from business overseas. For some, such business activity can involve using and working with foreign financial institutions and setting up bank accounts overseas. 2013 will authorize a 2014 implementation of new tax rules on deposits made, transferring funds out of the U.S. Funds transferred will be subject to a painful withholding amount of 30% unless involved businesses provide all the required tax identification information and location of overseas accounts on tax returns. This allows the IRS to collect all applicable taxes on income earned by U.S. taxpayers, even if earned overseas.
Many small businesses take advantage of Section 179 asset deductions, which essentially allow a business to write off certain asset purchases in total in one tax year rather than depreciating the cost over five years or longer. The limit on this deduction option is $139,000. However, in 2013 this powerful and useful small business tax savings will be serious limited. First off, computer software won’t be an allowable asset expense anymore. Second, the maximum allowable deduction of Section 179 assets will be capped at a far lower amount of $25,000. For any small business relying on these deductions to purchase valuable equipment, tools, assets and more, this change represents a serious loss on tax returns. As a result, if there is anything to buy for a business, many small companies should be making those purchases in 2012 before the end of the year.
Many will advise businesses should continue to make their decisions as needed, regardless of tax rule changes. If a business’ profit margin is so thin that the above tax changes create losses, that business needs to change how it pursues revenues and sales quickly or it will be facing bankruptcy fairly soon. That said, the above changes will reduce profit margins regardless, hitting small businesses in their own unique way. So here’s hoping Congress actually tries to get along for a change before January 2013; everybody’s taxes depend on it.
Walt Douglas is a corporate accountant and guest author at Best Accounting Schools, a site with guides and resources to help prospective students review top-rated online accounting degree programs.