Tax-rate uncertainty leaves small business owners in quandary

Posted: November 06, 2012

Taxes and uncertainty. Those words sum up one of the biggest worries facing small-business owners.

With the scheduled Dec. 31 expiration of the Bush-era tax cuts, many people who run small companies don't know how much they'll be paying in taxes in 2013. And many say that's why they have put off plans to hire and expand.

Compounding the uncertainty is that the outcome of the presidential and congressional elections is far from clear. President Obama and Republican challenger Mitt Romney have different ideas about tax policy, and it's hard to say whether Congress will act to stop the cuts from taking place.

Following is a discussion of the issues at hand:

Question: Which scheduled tax increases are small-business owners concerned about for the tax year that ends Dec. 31, 2013?

Answer: The change expected to affect them most is an increase in personal tax rates to 39.6 percent from 35 percent for single taxpayers with income of $200,000 or more and households with income of $250,000 or more.

Also expiring is the 15 percent rate on dividends. Those will be taxed as ordinary income, which means business owners who receive dividends from their companies will likely be paying much more tax on them.

Q: How do personal tax-rate increases affect small-business owners?

A: Most small businesses are what's known as "pass-through" or "flow-through" companies. The company itself doesn't pay taxes on what it makes - its owners report the income on their personal tax returns. Such companies include sole proprietorships, partnerships, and what are called S corporations. Income is taxed according to the owner's tax rate. The National Federation of Independent Business estimates 75 percent of small businesses are in this category.

Q: How many small-business owners would be subject to the highest rate?

A: The staff of the congressional Joint Committee on Taxation estimates 940,000 taxpayers with profitable businesses will fall into this category, or 3.5 percent.

Q: How is this uncertainty affecting business decisions?

A: "It's a major reason why people are not hiring now," said Jim Moniz, CEO of Northeast Wealth Management, a Braintree, Mass., financial-advisory firm with small-business owners as clients.

"It ultimately affects how many people we hire and whether we expand," said Darin Feinstein, whose businesses include five Fatburger franchises in Las Vegas.

Feinstein said higher taxes would come on top of other rising expenses, including what he pays for food and salaries. "My margins are shrinking to a number that would make me reconsider how many employees I'm going to have," he said.

Q: Should owners make decisions based on tax policy?

A: Financial advisers are sticking to the advice they have long given small-business clients: Taxes should be just one consideration in a business decision.

"Don't let the tax tail wag the dog," said Jeffrey Berdahl of RLB Accountants in Allentown. "If you need to hire someone for your business, you need to do it."

Q: If nothing is done to stop the expiration of the tax cuts, what can small-business owners do to prepare?

A: Determine whether there are ways to improve profits, Moniz said. Although higher taxes will hurt, having a higher income will mean there's money available to help the business grow.

comments powered by Disqus