Of the two certainties in life, we have at least some control over our taxes. Even though there have been many changes over the course of the previous and current tax years, there are some aspects bearing special importance to small business owners.
Three overall areas of recent change with which small business owners should familiarize themselves are in the realm of health care, payroll and business purchases, so let’s just dive on in, shall we?
1. Company Health Care
Despite all of the discussion and confusion surrounding the Patient Protection and Affordable Care Act (PPACA), there are a couple of overriding themes to be gleaned where small business employers are concerned. The new health care law (aka “Obamacare”) specifies that all employers with over 50 full-time/full-time equivalent employees must provide some kind of health care to their workers, or face penalties.
On the other hand, small businesses with less than 50 employees are not required to provide insurance (but they stand to benefit from a tax credit if they do). Currently, the credits are as large as 35% and are scheduled to grow to 50% in 2014. Qualifying small business owners are those who
- Have low-wage workers
- Pay at least 50% of the premium cost
- And have up to 25 full-time equivalent employees.
For details on how to calculate “full-time equivalent” employees and for more information on the requirements to claim these credits, visit the IRS website.
Interestingly, one of the largest criticisms about this mandate is that employers can skirt these employee caps by simply cutting hours of full-time employees so that they appear to be part-time, thereby resulting in lower incomes for individuals.
From another perspective, staunch reform supporters recognize that this provision could also be viewed as a “job creation” tool: instead of one person doing the job, you can divide it into two positions, with each employee receiving half of the workload and half of the wages.
Good for the unemployed, not so great for the full-timer whose hours and pay get slashed. We will just have to keep watching to see how these opposite positions play out in reality.
2. Payroll Taxes
As American workers discovered with dismay, their first payroll checks of 2013 were lighter by 2%. The reason for this is the expiration of the Payroll Tax Cut, which changed the required withholding from employees’ wages from 4.2% to 6.2%. Even though the chunk grows larger by the paycheck, the lower wage employees will feel it the most.
Think about it, if you make $2,000 per week and the government wants to withhold $100 of it, you’re still going to be able to keep your satellite television. But if you make $700 per week and the government keeps close to $40 of it, well, you may have to rethink some of your meals.
The unfortunate truth is that there’s no getting around this one – small business owners should be prepared to help their employees get through it as best as possible. Help them put systems in place for altering their budgets and planning ahead: suggest they start putting aside small amounts through the year for Christmas presents or extra purchases that they may not have had to worry about during the tax break times. Let them know they are not alone and that you are there to help them any way that you can.
3. Section 179 Deductions
But it’s not all bad news. Perhaps one of the best, and most beneficial, (non) changes to the tax code was the stimulus-driven extension of the $500,000 deduction for qualifying business purchases, including new and used equipment and software purchased off-the-shelf.
Originally set to expire for 2013 and revert to the previous cap of $250,000, this $500k limit is great news for businesses and was intended to spur you on to make those back-burner purchases now.
Although many people think of this deduction as complicated and tough to grasp, it’s a rather simple formula when you understand the calculation process behind it. You simply take all of your available tax deductions, multiply them by your tax rate and subtract that from the original total price of the equipment to calculate your cost after tax. Here’s an example in action:
Say that your company purchases $750,000 worth of qualifying equipment (that’s a hefty sum, I know, but it’ll help simplify our math). You are allowed to deduct $500,000 off the top, leaving you with a $250,000 difference. From here, you are also permitted to depreciate 20% of the remaining amount each year for the next five years, equaling $50,000 in the first year.
You’ve now got a deduction of $550,000 in the first year. Take this and multiply it by your tax rate, which we will say (for example’s sake) is 36%, for a total tax savings of $198,000.
From here, simply subtract your deductions ($198,000) from your original cost ($750,000) to reach a total cost of $552,000. This is what you “paid” for your equipment when all of your initial tax deductions were factored in. Not bad, huh?
Qualifying purchases include most tangibles intended for and used in conducting your business: vehicles, machinery and equipment, tangible personal property used in your business, computers and off-the-shelf software, equipment and furniture for your office, just to name a few. Check with your tax professional before large-scale purchases and act now to ensure you qualify for these deductions before the code changes again (it has changed mid-year before).
So, these are just a few of the most prominent tax implications for small businesses in 2013 and beyond. As always, communicate with your accountant and keep receipts!
What are your thoughts on the changes? Is there anything you encountered in compiling your 2012 taxes that you hope to avoid in 2013?
Guest Contributor: Erin Schwartz is responsible for marketing and social media programs at www.123Print.com. Their website is the go-to destination for promotional and office organization supplies like affordable business cards, mailing labels, post-it notes, and other items that combine high quality and customization with an affordable price.