Preparing Small Business for the Fiscal Cliff by Kenneth Strauss
By Kenneth J. Strauss CPA/PFS CFP Director of Tax and Personal Financial Planning. Berkowitz Pollack Brant Advisors and Accountants
Small-business owners across the country are on unsteady ground as they await word from Washington on how our government will tackle the record number of automatic tax increases and spending cuts that are set to take effect after the New Year. The uncertainty surrounding this “fiscal cliff” has put typical end-of-year planning in disarray as business owners wait and see what Washington will do.
What’s at Stake?
Whether Washington fails to make a deal and leads the country in a downward freefall, compromises or postpones sequester cuts leaving us hanging until the middle of 2013, the fact is that small businesses will be impacted in one way or another by these looming policy changes, some of which include:
- The disappearance of the 2 percent payroll tax holiday
- The addition of a 0.9 percent Medicare tax on wages of employees and self-employed individuals considered high-income earners (individuals earning more than $200,000 and couples earning more than $250,000)
- The introduction of a 3.8 percent Medicare surtax on investment income for high-income filers
- The return of the Alternate Minimum Tax (AMT), which will put a larger number of small business owners and the middle class at risk of falling under this provision
- The rise of individual income tax rates to a maximum of 39.6 percent, which will increase the tax liability on pass-through businesses that report business income on personal returns
- The phase-out of various tax credits, deductions and exemptions
- The increase in estate taxes to 55 percent and the decrease in exemptions to $1 million
The first step to maneuver through these uncertain times is to meet with financial and tax advisors in advance of the New Year to develop back-up plans that incorporate various strategies and courses of action to take.
New Strategies for Uncertain Times
Conventional tax planning advises small-business owners to minimize income and maximize deductions in order to reduce or postpone their tax liabilities. However, in an environment of higher tax rates, the opposite holds true. Business owners should instead accelerate income into 2012 and defer deductions and losses until 2013.
For example, to maximize income for the current tax year, business owners may opt to accelerate distributions or take a large bonus before the end of the year and delay payment of some expenses until 2013. Likewise, while it is not effective to pre-bill for undelivered goods or services, expediting the shipping and invoicing of products before the end of the year will effectively maximize earnings in 2012.
With the almost certain rise in capital gains taxes, business owners engaged in installment sales should consider opting out of installment sale treatment and paying taxes on the full gain now. By doing so, business owners can take advantage of the current 15 percent long-term capital gain rate rather than the potential 23.8 percent rate they would face by deferring the gain to 2013. Similarly, owners in the midst of negotiating a sale of their businesses might consider coming to terms with a buyer before Dec. 31 to avoid the nearly 9 percent tax increase.
While keeping a watchful eye on their own finances, business owners should not overlook how these changes to the tax code will affect their employees. Therefore, it is imperative that small-business owners meet with their employees now and advise them that if the payroll tax holiday expires, they will see a decrease in their take home pay.
Rather than throwing caution to the wind and waiting for Washington to act, small-business owners should meet with their tax advisors now and take the time to carefully peer over the cliff and develop various strategies that address all potential scenarios. Doing so will ensure they will be prepared to implement the appropriate plan when needed.
About the Author:
Kenneth Strauss CPA/PFS is a director in the tax practice at Berkowitz Pollack Brant Advisors and Accountants. Strauss is president-elect of the Florida Institute of Certified Public Accountants (FICPA). Founded in 1905, the FICPA works to advance the accounting profession and provide growth and education opportunities for its 18,000 members. For more information, call (954) 712-7000 or e-mail email@example.com.