The fiscal cliff deal made on January 1 wasn’t so much hailed as a grand gesture in the face of economic doom, as it was tolerated by a population fed up with a game of partisan chicken.
Sure, the fiscal cliff deal renewed some $46 billion in key tax breaks for small businesses like the Section 179 deduction, 50 percent bonus depreciation and the research and development tax credit. But the president still got his wish: higher tax rates. Under the facade of a economy-salvaging deal, the administration still pushed through a litany of increased taxes that will affect small businesses.
Income.com urges entrepreneurs to understand the subtext of the fiscal cliff deal and prepare for the consequences of higher taxes, not only on small-business owners themselves, but on the consumers they depend upon. Your understanding of the tax situation will be crucial to entrepreneurial success in the coming year.
Personal income rates
The biggest consequence of the fiscal cliff deal is the higher taxes for those earning more than $400,000. Individuals filing a single return of more than $400,000 and families with a joint return of more than $450,000 will see their tax rate increase from 35 percent to 39.6 percent. This can also affect some small-business owners making more than $400,000 as an S-corporation.
As evidenced by a recent Wall Street Journal article, owners who are above that threshold are stuck in a Catch-22 situation of sorts: Stay an S-corp and pay higher taxes, or restructure to a C-corp and pay higher taxes – twice!
Entrepreneurs have to know where they stand in relation to higher tax rates and make use of every tax break available to them – Section 179, bonus depreciation, research and development – to reduce how much Uncle Sam is picking from your pocket.
Payroll tax hike
The payroll tax increase means not just the wealthy will be paying higher taxes in 2013, but the entire U.S. workforce. The fiscal cliff deal included no extension of a 2 percent payroll tax cut, meaning the 2013 Social Security tax rate will stand at 6.2 percent for employees, a jump from 4.2 percent of the previous two years. The rate will also be 6.2 percent for employers.
The tax cut expiration will also cost entrepreneurs in another way. With their paychecks getting lighter, consumers might be less inclined to spend money. To cope with the potential drop in consumer spending and confidence, entrepreneurs will have to get innovative with their marketing tactics and special offers.
To get the most out of consumer spending, considering running a special that involves cross-selling a consumer: incentivizing the purchase of an item that would complement one they already bought, such as a reading lamp and book package.
Income.com wants entrepreneurs to know they will have to mimic their customers’ behavior in order to meet the evolving demands of a consumer base that is feeling the squeeze from higher taxes. Just like those above the $400,000 threshold and those paying higher payroll taxes, businesses will have to stretch a dollar in order to cater to consumers.