How the PATH Act Affects Your Small Business

Federal taxes have for years been one of the top headaches for small businesses with seemingly no end in sight. Among countless shifting tax provisions, retroactive extensions, and a large helping of legalese involving even the simplest of tax rules, small business owners are now required to spend a tremendous amount of time each year complying with federal tax regulations and filing their returns.

Just how much time? Well, a recent Small business Taxation Survey, conducted by the National Small Business Association (NSBA) reported that 22 percent of small business owners devote as many as 120+ hours a year, or four full work weeks, to their taxes. This includes activities such as: completing forms, keeping up with changing regulations, as well as organizing receipts and paperwork. A full one third of the small businesses surveyed spend more than 80 hours per year on their federal taxes.

Even as the current administration in Washington considers a massive tax overhaul that will supposedly make complying with federal tax regulations a whole lot easier and cheaper, the has been at least one recent bright spot: the PATH Act enacted at the end of 2015.

The PATH Act makes more than 20 tax breaks permanent in addition to retroactively extending a slew of others for two or more years. In some cases, these include significant modifications. Some of the extensions, such as those involving equipment purchases and payroll, give small business owners some breathing room to plan for and thus maximize certain tax deductions.

Here are three main areas where the PATH Act may positively help your business:

1. Equipment Purchases. With the PATH Act, the price of big equipment purchases can be fully written off in the year they are put into service instead of taking small deductions over a period of five years. Under Section 179, business owners are allowed to deduct up to $500,000 for either new or used equipment purchases. The deduction limit starts to phase out when qualified property is more than $2 million. Both deduction amount and limit will be adjusted for inflation starting in 2016.

On top of this, the PATH act offers a second, “bonus depreciation” of 50% that can be used after the Section 179 deduction has been taken. This deduction dwindles, however, in coming years to 40% in 2018 and 30% in 2019. In 2020, the deduction will expire completely.

2. Payroll. Businesses that hire employees from certain categories, such as military veterans or those who qualified for long-term unemployment, may be eligible for the Work Opportunity Tax Credit. The PATH Act extended the credit through 2019 and added a 40% credit up to the first $6,000 in wages for businesses who hire qualified long-term unemployed individuals who have been without work for 27+ weeks.

3. Research & Development. The PATH Act permanently extends the Research and Development Tax Credit. This credit helps small businesses recover some of the costs of R&D including the expenses of obtaining a patent. Beginning in 2016, eligible small business with $50 million or less in gross receipts can claim the credit against alternative minimum tax (AMT) liability.

On top of these incentives for small businesses, the PATH Act also offers numerous individual tax breaks that may indirectly help small businesses as well. For more information, consult the IRS’s online tax center.

Will Your Small Business Fall off the Fiscal Cliff in 2013?

According to several recent surveys, such as NFIB Small Business Optimism report mentioned in my previous post and the U.S. Chamber of Commerce Q2 Small Business Study, small business owners are currently concerned about their tax requirements, a situation that has been exacerbated by the fact that the economy remains listless despite all the stimulus that has come its way.

But as we head towards the second half of the year, a greater tax specter looms large. This is the so called “fiscal cliff”- a challenging collection of tax breaks that will expire at the end of 2012, combined with a set of new taxes that will be going into effect in 2013. According to the Chamber of Commerce survey, a full 90% of small business owners are worried about the impact of these impending tax changes will have.

Barring Congressional action, here are some of the most pivotal tax changes waiting for us at the end of this year:

  • Several Bush-era tax breaks are set to expire resulting in a 3 percent increase on individual income tax rates in 2013. Those making more than $388,350 a year, will see a 4.6 percent increase.
  • Payroll taxes will increase to 6.2 percent from 4.2 percent. This will be particularly hard for small business owners who are both owners and employees of their businesses.
  • The tax break for capital purchases will end. Under Section 179, if you purchased equipment for your business this year, you can deduct half the cost on your taxes right away and it counts as depreciation. In 2013, the depreciation rules will revert to their normal setup allowing you to only deduct the cost of equipment gradually, over the life of the asset.
  • The Alternative Minimum Tax (AMT) may tax many middle class Americans, including small businesses. The intention of the AMT is to prevent wealthy individuals from using numerous deductions to significantly drive down their tax obligations so that they are effectively paying too little. But the threshold for those who are subject to the AMT is currently set at $150,000, an amount that will likely affect many middle class workers and small business owners. AMT also affects LLCs, partnerships, and S Corporations.

These tax changes combined with our difficult economy may be a one-two punch that will effectively knock out many small businesses- and that doesn’t seem like such a good move for our country.

Are Obama’s Efforts Enough for Small Business?

Last week, the Obama Administration announced that it is taking a series of “immediate actions to help small businesses” survive and thrive in the challenging economic conditions we, as a nation, continue to find ourselves in. But many small business owners are left wondering if Obama’s efforts are either immediate or enough to make any significant difference.

 

 

 

 

 

 

 

 

 

Many are quick to point out that some of the initiatives included in the supposedly new package were part of an already established executive order. Others, maintain that most of these moves will only benefit a relatively miniscule population of small companies, such as construction contractors.

Here’s a quick rundown of the Obama Administration’s small business initiatives:

  • Paying government contractors quicker in hope that “those prime contractors will similarly accelerate payments to their small business subcontractors.”
  • Recommend that Section 179 expensing remains at $250,000 for one year. This will allow small businesses to write off up to $250,000 in capital investments in 2013. If the extension is not approved by Congress then the expensing limit for small businesses is scheduled to decline to only $25,000 in 2013.
  • Re-launch the SBA’s Small Loan Advantage program (now called SLA 2.0). Obama is pushing to raise the maximum amount a small business owner can request for an SBA loan from $250,000 to $350,000. Obama is also seeking to streamline the loan process, so it will be easier and quicker for lenders to extend loans to small businesses.
  • For companies that need surety bond guarantees under $250,000 the SBA will be initiating the “QuickApp” streamlined application. This will reduce paperwork in the hope that small companies, particularly in the construction industry, will have an easier time competing for and winning additional business.
  • Reduce paperwork for SBA’s Disaster Loan Program so that families and businesses will be able to more quickly and easily access support for rebuilding after a disaster.
  • Make it easier for community development entities (CDEs) to bring in private investors for start-ups and small businesses operating in lower‐income communities by revamping the New Markets Tax Credit.

Will these moves truly help small businesses? I’m skeptical; but I guess only time will tell.

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