4 Huge 'Tax' Increases That Could Affect Your Business
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 midsize clients and one common theme will come up: taxes.
Most of the business owners I know pay anywhere from 20 to 30 percent of their net income to the federal government, between Social Security, Medicare, and corporate or individual taxes. 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 went up.
- 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.
Are you a business owner? 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:
1. 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 that they do decide to invest are providing much less tax benefit to them than in the past.
2. 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.
3. The federal deficit. The President's proposed budget, released this week, 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" are still half a trillion 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.
4. Health care reform. 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 isn't the tax that 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 | Columnist | Owner, Marks Group
Gene Marks is a columnist, author, and small-business owner. He oversees the Marks Group, a 10-person technology consultancy to small and medium-size businesses. A certified public accountant, Marks has also worked in the entrepreneurial services arm of KPMG. He writes for The New York Times, Forbes, and The Huffington Post.