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.

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