January 22, 2013
On January 3, 2013, President Barack Obama signed into law a bill, the American Taxpayer Relief Act of 2012 (ATRA), also known as H.R.8, passed by the House of Representatives and Senate to avert the "fiscal cliff." It was not the "big compromise" that everyone was hoping for addressing taxes, spending cuts, and the debt ceiling. The bill ended up being only a fraction of that, addressing mostly taxes. It did, however, address taxes for small business to some extent.
What was the Fiscal Cliff
The fiscal cliff was a mostly man-made deadline at the first of 2013 that resulted from the inability of the Congress and the President to work together during Obama's first term in office. A number of financial deadlines fell together at the first of 2013 about which decisions had to be made and was named "the fiscal cliff." If some sort of compromise had not been made, automatic spending cuts and tax hikes would have kicked in that some economists believe would have kicked our economy right into another recession. Fortunately, a small compromise was reached, though the fiscal cliff has to be addressed again later in 2013.
Were the Bush Tax Cuts Kept in the Legislation?
One of the issues in play during the fiscal cliff negotiations were the Bush tax cuts which were made a decade ago. The President wanted to keep the Bush tax cuts for all Americans making $250,000 or less. The Republican Party wanted the income level to be $1 million. They compromised at $400,000 for individuals and $450,000 for married couples.
What Does this Mean for Small Business and Regular Income?
For small businesses that are set up as sole proprietorships and partnerships and are not incorporated, your business taxes are filed with your personal taxes and are subject, to some extent, to the rules for filing personal taxes. ATRA retains the existing tax brackets of 10, 15, 25, 28, and 33 percent income tax brackets. A 35% tax bracket will end at $400,000 for single individuals with a small business for 2013. Above $400,000, a new 39.6% kicks in on your personal plus business income for 2013.
The income level is not $400,000 for every type of filer. For example, for Single filers with a small business, the income level is $400,000, but married couples filing jointly with a small business has an income cut-off level of $450,000. Other filers and their income levels are the following: Head of Household $425,000; Qualifying Widow(er) $450,000; Married filing Separately $225,000.
What about Dividend Income and Capital Gains Income?
Under ATRA, there are three tax brackets on dividend and long-term capital gain income for small businesses filing as individuals. They are 0%, 15%, and 20%. The bracket in which you fall depends on your level of income. The 0% rate applies to you if you are in the 10% and 15% tax brackets. The 15% rate applies to you if you are in the 25 28, 33, or 35 percent tax brackets. The 20% rate applies to you if you are in the new 39.6% tax bracket.
Payroll Tax Cut Legislation
Two years, the President gave us a temporary reprieve on payroll taxes, dropping them by 2% stimulate the economy. Those payroll taxes have now gone up to their previous level. Employee payroll taxes (social security taxes) have now increased two percent. As a small business owner, you should immediately make that change in your payroll system.
There are other changes to the tax code which will affect small business owners who file with their personal taxes. Those changes include estate tax changes and change in the alternative minimum tax. You should check with your tax accountant when you file your taxes for all the details.