The Fiscal Cliff: 3 Tax Changes Business Owners Need to Know Are Coming

We keep hearing about the Fiscal Cliff that is coming at year-end. If refers to the many “Bush Tax Cuts” that will expire as of 12/31. However, there are a few that don’t get as much attention that entrepreneurs and business owners need to know about.

Business owners are really worried about several of these. In fact, about 9 out of 10 small business owners are concerned about the fiscal cliff, according to the US Chamber of Commerce. To add to it, they are, and myself included, worried that Congress won’t act to prevent the tax changes.

If you want a breakdown of all the taxes that will be affected, read my blog post What The End of The Bush Tax Cuts Mean For You.

Here are three important tax changes and how they could affect you:

1. Payroll taxes are going up. The extension that the President authorized will expire at the end of this year. Without our hard-working Congress taking action, employee payroll taxes will go from 4.2% to 6.2%! This will put a hurting on small business owners immediately. And it certainly won’t inspire them to go out and hire more people.

2. The early tax deduction for business equipment will end. Right now if you purchase a piece of equipment for your business, you get to deduct half the cost on your current taxes as depreciation. Unless our hard-working Congress gets busy, in 2013 the depreciation rules will return. Therefore, you will only be able to deduct the equipment gradually over the life of the asset. So if you are considering purchasing new stuff, you may want to do it by the end of the year.

3. The tax meant only for the rich guys could hit you. The Alternative Minimum Tax (AMT) was set to prevent wealthy individuals from driving their tax bill too far down with deductions but AMT also affects LLCs, partnerships, and S Corporations. This tax strips out many deductions and then imposes what is effectively a flat-tax of either 26 percent or 28 percent. You have to pay whichever is higher. So if you are earning say between $150k and $1 million bucks, you’ll get to pay the AMT.

The original idea behind AMT was to make rich guys pay their fair share. The threshold has not been adjusted over the years. Therefore, more of middle class Americans are being hit with the rich guy tax. It will affect about 31 million filers in 2012.

If you own a business and don’t have faith that our hard-working, Git-r-done Congress will act in time to keep us from going over the fiscal cliff, then you need to review your business plans. Write to me at  david@lexwealth.com, or call me at (859) 225-2596.