4 ‘Tax’ Increases That Could Affect Your Business
Between Social Security, Medicare and corporate or individual taxes, most business owners I know pay anywhere from 20% to 30% of their net income to the federal government.
Small-business confidence remains significantly below pre-recession levels. Why? It isn’t just the cold winter, the uncertainty and the sluggish growth.
Ask any of my more than 500 small and mid-size clients and one common theme will come up: taxes.
Between Social Security, Medicare and corporate or individual taxes, most business owners I know pay anywhere from 20% to 30% of their net income to the federal government. And this excludes state, local, sales and other taxes. It’s a big number for all of us. And we’re concerned that it’s going to only get worse. There’s good reason to be concerned. The past year saw a slew of taxes hitting both individuals and small businesses.
- Social Security taxes were restored to their original rate after years of “stimulus.”
- Medicare taxes increased.
- A new tax on unearned income was imposed.
- Rates on higher earners increased to levels not seen in decades.
- Capital-gains taxes went up.
- The ceiling for itemized deductions was raised.
- The tax advantages of certain employee benefits, such as health savings accounts, were reduced.
As I write this, those higher taxes are being calculated by our accountants who are putting together our corporate and personal returns and bringing us bad news: We owe more than before. This hurts.
But we’re not done yet.
Many of you are business owners. Your money is at stake. Pay close attention to what’s going on in Washington this year. The following are four enormous new costs to businesses potentially on the way, particularly if some of President Obama’s proposals become law. In my view, they amount to taxes on business. They are:
Research and investment costs
OK, these are not compulsory costs, but they’re necessary for growing businesses.
At the end of 2013, two enormous business tax benefits effectively went away. The first was the ability for small companies to take accelerated depreciation (or, in other words, write off an asset faster) for capital purchases up to $500,000. That amount is now down to only $25,000 in 2014.
In addition, the popular credit that businesses could earn by spending money on research and development also expired at the end of last year.
The result is a double-edged killer: Businesses have less incentive to invest in capital equipment or spend money on research and development. And the amounts they do decide to invest are providing much less tax benefit to them than in the past.
The proposed minimum-wage increase
In my view, an increase to the federal minimum wage would be a tax. But as taxes go, it isn’t a bad one. Actually, the money goes straight to the employee instead of to the government.
The president is campaigning hard to increase the federal minimum wage to $10.10 per hour, up from $7.25 per hour. Right now, a full-time employee making minimum wage earns about $16,000 per year, which is sadly low.
A person at this income level likely receives welfare, food stamps and medical help from the government. The government cannot afford to pay more in these tight budgetary times.
What to do? The president is effectively turning to businesses. He wants to require us to pay our people more. Business owners hate to be told what to do by the government. Most business people I know can not only afford to pay this extra amount, but concede that no one working 40 hours a week should be earning such a small income in 21st-century America.
Whatever your opinion, the increase is unlikely to happen.
But this potential “tax” is out there and it erodes business confidence.
The federal deficit
The president’s just-released proposed budget continues the strategy he set out in his state-of-the-union address of ignoring our growing federal deficit and national debt. Many feel that our deficits are not a political issue in 2014 because they’re going down.
But many economists, even the Congressional Budget Office, forecast deficits creeping back up toward $1 trillion a year in the next few years as the cost of entitlement programs comes due. And even deficits that are “going down” still are $500 billion dollars a year (they were “only” $174 billion in 2007) and are adding to our unsustainable level of national debt at a frightening pace.
How will this be solved? The president (and many members of Congress on both sides of the aisle) is counting, among other things, on tax reform and the closing of loopholes that businesses are legally using to save on taxes — in other words, an enormous tax increase.
No, it isn’t what you think. The employer mandate, which requires any business with more than 50 full-time-equivalent employees to provide health insurance to their full-timers starting in 2015, is not a big deal for most of my accounting clients. They already provide health insurance.
The penalty for not providing this insurance is a tax, in my opinion, but it In my opinion, the penalty for not providing this insurance is a tax, but it isn’t the tax my clients are concerned about. The concern is that they will be required by law to provide a minimum level (i.e., “bronze”) of health insurance going forward.
As rates inevitably go up (and some are predicting significant increases), the ability of the business owner to share these costs with employees is significantly limited because of the federal law.
More taxes are here. More taxes are coming. That doesn’t make me (and many other small-business owners) optimistic at all.
Gene Marks’ presentation “Business Valuation: Is Your Business Worth What You Think It’s Worth?” will be a featured educational presentation at NetworkASA 2014 at the Bellagio in Las Vegas, Sept. 9-11. Visit www.asa.net/Networking for full program details and registration materials.
Gene Marks is a columnist, author and small-business owner. He writes daily for The New York Times and weekly for Forbes, The Huffington Post Magazine, Entrepreneur.com, FOX Business and Philadelphia Magazine. Gene has written five books on business management specifically geared toward small- and medium-size companies. His most recent is “The Manufacturer’s Book of Lists” (Create Space, 2013). Follow Gene Marks on Twitter.