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WHAT DOES THE FISCAL CLIFF SOLUTION MEAN TO SMALL & MEDIUM SIZED BUSINESSES? The recently passed fiscal cliff solution passed by the Senate and House essentially kicks the can down the road for Q1 2013. It does not address the government debt limit, reducing debt nor address the automatic spending cuts other than postponement for two months. The majority of small and medium sized businesses operate as S corporations and LLCs; thus this discussion focuses on the tax changes for individual taxpayers rather than corporations. NEW TAX IMPACT Top tax rate1 Estate tax Capital gains tax Dividend tax Payroll tax ObamaCare payroll tax 2012 35% 35 15 15 10.4 0 2013 41%2 403 23.84 23.84 12.4 0.95 Notes: 1. Above $400,000 for singles, $450,000 for joint filers. 2. Includes new phase out for various deductions. 3. Exemption remains $5 million. 4. Includes ObamaCare 3.8% investment income surtax. 5. Income above $200,000 for singles and $250,000 for joint filers. Source: U.S. Senate Essentially with surtaxes added and phase out of deductions, business owners with adjusted gross income above $400,000 will be facing a maximum tax rate of about 46%. There is some good news for most tax filers in that Congress finally indexed the Alternative Minimum Tax tables which will allow many of the middle class to now avoid the additional tax. For most business owners, the impact of the Affordable Care Act is still unknown as it will take full effect January 1, 2014. Key factors are: 1. For companies of 50 employees or more, the cost of employee health care is expected to increase by at least 33% on 1-1-2014. 2. The number of employees will be based on 30 hours per week thus expanding eligibility. 3. The number for qualifying employee count is based on hours, W-2s and 1099s issued rather than headcount. 4. Companies with high turnover, part-time employees will be penalized in the calculations. The near term result for small and medium sized businesses is the same for all businesses…continued uncertainty. The current consensus among economists is that the impact to the 2013 U.S. GDP is likely to reduce growth by 0.5 percent yet they still see growth in the economy this year. NEXT STEPS FOR THE BUSINESS OWNER This new bill represents the largest tax increase in the past two decades and requires planning rather than panic. The next steps to preserving your business are: 1. Consult your tax planner to determine how to minimize your potential tax liability. (There are enough known facts now to start a plan.) 2. Consult with your employee benefits advisor on the latest information for changing healthcare plans. 3. Model these impacts into an operating forecast and cash flow to determine what operations changes are needed after getting data on items 2 and 3 above. 4. Review these plans with your banker or other funding sources to show them that your business is viable. 5. Watch vigilantly the battle that will ensue over the government debt limit, spending cuts and other political battles to determine what impact might be specific to your industry. C Squared Solutions offers consultation on accounting, financial, transactional, operational and financial/IT systems issues to all size firms around the World. We provide extensive financial models to plan and operate your business. Contact us for further information on how to identify and resolve issues affecting your organization. 1624 Market St., Suite 202, Denver, CO 80202 www.c2solves.com (303) 417-6353