What You Can Do About Rising Taxes
If you're running a small business, then brace yourself: Taxes are going up again this year. But there are things you can do about this, if you act now.
But, you say, taxes went up in 2013! And yes, you are right: Medicare, capital gains, dividends and personal rates for many increased. A new "unearned income" amount was levied on passive earnings like interest or the sale of your primary residence. The ceiling for itemized deductions was raised. This is all true. Unfortunately, there's more coming this year.
That's because Congress allowed 55 deductions, credits and other tax incentives to expire (or be greatly reduced) at the end of the 2013. Gone are the research and development and energy tax credits. Almost gone is the accelerated depreciation deduction on capital expenditures. Gone is the popular deduction for state and local sales taxes benefits for those people who live in the nine states without state income taxes, and other tax breaks that benefit college students and commuters who use public transportation. And these are just a few. Will any of these tax breaks be reinstated this year? It's tough to tell.
So in the meantime, what's a business owner to do?
"Make sure you're paying into a retirement plan," advises Stuart Robertson, president of ShareBuilder 401K. "It's a great way to not only help your employees to save, but it will also save you on taxes."
Robertson's firm advises their clients, mostly small businesses, on the different types of retirement plans available to them. And for the most part, there are three choices that small businesses need to consider:
Simple Employee Pension Plan (SEP)
An SEP is easy to set up and operate, has very low administrative costs and allows you to be flexible with your annual contributions. You can deduct (up to a certain amount) what you contribute to your employees' accounts and, to a limit, take a deduction for your personal contribution, too. It's a great plan if cash flow is the issue. But know that you must contribute equally for all eligible employees.
401(k) Retirement Plan
This is the same as an SEP except that a 401(k) allows the employee to contribute and also give you more investment choices. A 401(k) is a little more costly, but not much. They're are also easy to setup. Depending on the 401(k) plan chosen, you can allow employees to vest in your contributions over time and enable them to borrow money or take hardship withdrawals from their accounts. 401(k) plans are also subject to discriminatory rules, which means that you can't contribute more for you and the senior team, relatively, than for the rest of your employees.
Employee Stock Ownership Plan (ESOP)
An ESOP is for more established, profitable businesses where the owner wants a long term plan to transfer ownership to his/her employees. Plans can vary, but in a typical ESOP, a set amount of equity is transferred to each employee's account every year based on a pre-determined formula. At the time of retirement the owner is usually given the choice of awarding shares to the employee or cash for the fair market value of the shares. Contributions to the plan are tax deductible. An ESOP is a great way to transfer ownership over a period of time, thereby deferring capital gains taxes on the sale while also giving employees the motivation of ownership. As of 2014, the National Center for Employee Ownership estimated that there were almost 12,000 employee stock ownership plans (and similar profit sharing and stock bonus plans) covering about 11 million employees.
"Many of the business owners I know, particularly the ones running companies with less than 50 people, are under-using these retirement plan options," Robertson says. "But the good news is that more people are becoming aware."
Business owners will be faced with more taxes this year. And as the baby-boomer generation ages, many are also facing retirement in the short term years to come. In 2014, the right thing to do is to re-address your retirement plan.
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.