Small-business owners can't predict what their tax bill will be in 2013. Or how much work they'll get, if they rely on government contracts. Or how much money they will be paid, if their practices rely on federal programs such as Medicare. The so-called fiscal cliff is looming, and the sense of uncertainty grows as the last weeks of the year play out.
There's still no agreement on the horizon between the president and Congress over how to respond to the debt-ceiling problem. With tax hikes proposed, and federal spending cuts on the table to the tune of some $109 billion annually (for 10 years), small-business owners may very well feel these changes hit home. What follows is a guide to the key issues for small businesses, and a look at what owners can do to prepare for a fiscal-cliff event.
Bush-Era Tax Cuts
Small-business owners are focusing, in part, on the idea of tax cuts as a barrier to growth. Bush-era reductions lowered the top tax rate to 35 percent for payers making more than $250,000 annually. If the cuts expire, that top rate climbs to 39.6 percent.
Opinions differ regarding the importance of that scenario.
Dan Danner, president and CEO of the National Federation of Independent Business, says the consequences for small businesses would be dire.
"In all, these tax increases amount to a $500-billion tax bill for the private sector, mainly small businesses whose reluctance to expand is caused by political uncertainty," he writes in a recent NFIB release. "Small firms, historically the primary source of the nation’s new jobs, are struggling . . . this combination of tax increases and spending reductions could send the economy back into a recession further exacerbating small-business owner’s outlook."
In a letter to Congress signed by 600 owners, however, the message is that Bush-era tax rates are less about small business on a day-to-day basis, and more about politics. Let them expire, these owners suggest.
"Those who claim that tax cuts help small businesses are guilty of identity theft," the letter reads. "Less than 3 percent of tax filers with any business income make over $200,000 (individuals) or $250,000 (couples) per year, and many of those are not small-business owners, much less small-business owners with employees . . . The high-end tax cuts are hurting our economy. It’s time to end them, not extend them. This would be an important step in rebuilding an economy that grows our small businesses and middle class."
Somewhere in the middle of the two points of view is Ross Almlie, founder and CEO of BreadVault, a digital savings management platform for consumers.
He takes a survivalist's point of view on the matter. "I suspect we'll see small businesses struggle a bit more under automatic spending cuts and a higher tax-rate environment," Almlie says. "BreadVault will likely struggle a bit, but whoever said business is easy to begin with? America wasn't built with an easy button. Small-business owners are at our best when we're on the ropes. Fear is a great motivator."
Further Fiscal-Cliff Effects
There's more to it than just the expiration of the Bush-era tax cuts; small-business owners need to be aware of the following changes.
Alternative Minimum Tax: Some middle-class taxpayers could see the Alternative Minimum Tax—a flat rate that supersedes the usual tax rate for certain high-income earners—become their new reality. If it happens, it is expected to affect some 32 million individuals, taxing many middle-class payers as if they were rich.
Social Security Tax: It would climb to 6.2 percent from 4.2 percent, post-cliff.
Federal Spending Cuts: Expect about half the annual $109 billion in fiscal-cliff cuts to come from national defense. But also look for other programs to take a hit. Doctors would see, for example, about a one-third reduction in payments from Medicare. Student loan fees and unemployment benefits would be affected, too.
How to Prepare Your Business
Jim Blasingame is the host of syndicated radio program, The Small Business Advocate Show. He has advice for small-business owners as well.
1. Partner with your bank. "Just like in 2009, build a conservative business scenario that includes a cash flow projection for all of 2013 that you can show to your team," Blasingame says. "Show it to your banker so he or she can see how you're preserving cash, getting accounts-receivable cleaned up, and tightening up credit at least a little. Where you identify a negative cash possibility for any months, get your banker to commit to help you cover that with a working capital term loan. Bankers like this kind of advance warning. With that document, you can make your banker your partner in 2013."
2. Implement technology and new-equipment purchases, today. If the U.S. goes over the fiscal cliff, the capital-purchases deduction will drop from $139,000 to $25,000 in 2013. Get those deductions in before the end of the year.
3. Map a move from government contracts to commercial. If federal spending is slashed by more than $100 billion annually, then federal contracts will be scaled back. It would be a wise move to map out what it takes to shift toward commercial contracts, if your small business is currently reliant on government projects.
4. Talk to your accountant. For small-business owners who declare their business profit on their personal income-tax returns, this could be the time to talk to an accountant. Incorporation, and other restructurings of how you declare, may help you to avoid a potential top-tax-rate hike, should your income end up greater than $250,000.
Roll with the Punches
As for Almlie of BreadVault, he's ready to make sacrifices, but he wants Congress and the president to hear one message.
"Deal or no deal, the math doesn't compute either way," he says about the current state of federal debt. "The root of the problem continues to be ignored, so we'll just roll with the punches and make sacrifices as needed, which is nothing new to a small-business owner."
James O'Brien is a correspondent for Boston University's Research Magazine and a news correspondent for The Boston Globe. He joined the caption-research team for photo-essayist Rick Smolan's new book, The Human Face of Big Data, in 2012. James blogs via Contently.Photo: Getty Images