Small business owners could be in for what’s effectively a wave of new taxes next year. I’m not talking about taxes relating to health care reform, but to the fact that many of the tax cuts put into effect in 2001 and 2003 (some people call them the “Bush tax cuts”) are due to expire January 1, 2011.
The taxes affect investors, small business owners and individuals. Here’s a look at some of the changes:
Personal income tax rates will increase. The top income tax rate (the rate at which two-thirds of all small business profits are taxed) will go from 35 to 39.6 percent. Here is the full list of marginal rate hikes:
- The 10 percent bracket rises to15 percent
- The 25 percent bracket rises to 28 percent
- The 28 percent bracket rises to 31 percent
- The 33 percent bracket rises to 36 percent
- The 35 percent bracket rises to 39.6 percent
The Alternative Minimum Tax (AMT) will also affect more families—an estimated 28.5 million, or 4 million more than last year.
Bill Rys, tax counsel for the National Federation of Independent Business, noted that these changes to the marginal tax rate will drastically affect small business owners “since the vast majority of these businesses pay their taxes at the individual rates.”
In addition, many tax provisions specific to business are also affected, such as the ability to expense rather than depreciate small business assets. The HIRE Act temporarily increased the IRC Section 179 deduction for 2010, enabling taxpayers to immediately expense certain qualifying assets acquired in 2010 up to $250,000. The deduction phases out if over $800,000 worth of assets is acquired during the year. The deduction is expected to decrease to $125,000 in 2011.
Many other business tax provisions are due to expire in 2011. The Joint Committee on Taxation has published a full list.
Concerned about the impact these taxes could have on the nascent economic recovery, the Senate Finance Committee held a hearing in July to discuss the soon-to-expire tax cuts and how they might be extended without increasing the budget deficit. This article on WebCPA takes a look at that hearing and some of the issues involved.
Will the changes be extended in time to keep your business from paying more taxes next year? It’s hard to say, but this is definitely an issue to keep your eye on -- and to discuss with your accountant so you’ll be ready for whatever occurs.
