What the Fiscal Cliff Tax Deal Means for Small Business

Congress passed the American Taxpayer Relief Act – aka, the fiscal cliff tax deal – in the wee hours of January 1, 2013, and President Obama is expected to sign the new legislation as soon as possible. After the dust from the deal-making settled, the bill contains a mixed bag of both good and bad news for small business, as outlined at Forbes.com:

The Good News

Makes permanent the tax rates on ordinary income, estate, dividends, capital gains and alternative minimum tax rates. The AMT exemption increases to $50,600 for individuals and $78,750 for married couples, and is retroactive to Dec. 31, 2011.

The Research and Development tax credit is extended through 2013 and made retroactive for 2012.
Section 179 limits kept in place – maximum of $500,000 and $2 million phase-out for 2012 and 2013.
Work Opportunity Tax Credit extended for 2013.

Accelerated Depreciation — 50 percent expensing for qualifying business assets purchased and put into service before Jan. 1, 2014 (Jan. 1, 2015 for select long-term assets and transportation).

The Mixed Bag

Income – tax rates raised from 35 percent to 39.6 percent for individuals making $400,000 or more and married couples with income over $450,000. Since most small businesses are organized as LLCs, partnerships or S Corps, owners are taxed at the ordinary income rate.

Capital Gains and Dividends – top tax rate increases to 20 percent, beginning at the $400,000 level for individuals and $450,000 for marrieds.

Estate Tax — $5 million exemption per person kept in place and indexed for inflation and top tax rate increased to 40 percent. Portability is kept in place, as is $5 million exemption for gift tax purposes. All permanent.

PEPS and Pease – the Bush tax cuts eliminated the phase-outs of personal exemptions and certain itemized deductions — known as PEPS and Pease – but there are now back for individuals making more than $250,000 and married couples with income above $300,000.

The new fiscal cliff tax deal did nothing to stop the 0.9percent tax increase on ordinary income over $200,000 for individuals and $250,000 for married couples, nor the 3.8 percent additional tax on capital gains and taxes that were included in the Obamacare legislation. Those both went into effect as of Jan. 1, 2013, as did the payroll tax jump of two percent, from 4.2 percent to 6.2 percent on all earned income up to $113,700.

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