Barbara’s Blog

The Senate is focusing on passage of a bill (S. 2237) that purports to help small businesses. It would give them a tax credit for expanding payroll and allow them to take 100% bonus depreciation for certain equipment purchases (rather than the 50% write-off that’s currently in effect for 2012). Would this be a good law?

It’s time that we analyzed whether tax incentives really induce the intended action. The problem is that there are existing counterweights already in the tax law to the proposed incentives. Let’s take a look at the first proposal — a tax credit for expanding payroll by taking on new workers or raising pay for existing workers.

Payroll credit

Qualifying for this tax credit will cut or eliminate eligibility to claim the small employer health tax credit. This other credit, which is up to 35% of health insurance premiums paid by small businesses for their staff, is determined with reference both to:

1. The number of workers (although the credit has a complex formula based on so-called full-time equivalent employees); and
2. The average payroll.

The higher both of these factors go, the lower the small employer health insurance credit. The credit, which is part of the now-constitutional Patient Protection and Affordable Care Act (Obamacare), was supposed to help 4 million small businesses, but fewer than 400,000 actually claimed the credit, and of these, fewer than 40,000 qualified for the full 35% credit. 

Bottom line: Enactment of a jobs credit would merely exchange one tax credit for the other in some small businesses.

Even worse, expanding payroll to 50 employees or more will trigger a business mandate under Obamacare to provide essential health coverage to workers starting in 2014. What this will cost is unknown at this time, but what is certain is that many companies that already have 45 or so employees are not growing their payrolls at this time. And, in fact, companies already over the tipping point may cut their payroll to have fewer than 50 employees.

Bonus depreciation

The other provision — to encourage investments in capital equipment by allowing a full write-off using bonus depreciation — is another provision that may help large companies but won’t be significant for small businesses. Any business, regardless of the number of employees, the amount of revenue, or profitability, can claim bonus depreciation; it’s not exclusively a small business tax break.

On the other hand, the Section 179 deduction (up to $139,000 in 2012) is meant specifically for small businesses because the dollar limit phases out for purchases over another limit ($560,000 in 2012); large companies spending more than $560,000 in equipment purchases lose some or all of the deduction.

Bottom line: Very few small businesses invest annually more than $139,000 in machinery and equipment (including computers, smartphones, and off-the-shelf software), so again there is no need to raise the cap on bonus depreciation. Don’t get me wrong; 100% bonus depreciation would be a nice break, but it is not essential for small companies at this time.

FYI: NFIB’s small business optimism survey for June shows that only about half of small companies expect to make capital expenditures in the next six months and, of those that do, about 20% represents vehicle purchases (which have their own tax rule limitations).

Conclusion

Good policy or bad distraction? This tax bill, labeled as being for small businesses, belies the fact that it really won’t matter much for its intended target: small businesses. In my opinion, it won’t incentivize action. What’s really needed to help small businesses is tax certainty (not rules that expire year after year) and continuation of the current tax rates.

So the U.S. Supreme Court says Obamacare is constitutional. What does this mean for you and your business?

Here are 5 results of this court decision that are problematic to me.

1. The IRS governs health care?

Apparently so, according to the Supreme Court’s ruling that the individual mandate is constitutional. The rationale for upholding the mandate: the penalty that individuals will have to pay if they don’t have required medical coverage starting in 2014 is merely a tax. And who’s going to collect the tax? The IRS!

While the law prevents any criminal action for those who won’t pay the penalty, who knows how enforcement by the IRS will be actualized. Will the IRS ultimately be able to say what medical treatments will be covered by insurance?

2. There’s a loss of privacy for your tax return

Currently, your personal and business tax returns are subject to strict privacy rules. If IRS employees divulge any information, there are serious consequences. Now, under Obamacare, the IRS must tell the “Health Choices Commissioner” and state health programs about taxpayers, including their filing status, modified adjusted gross income, the number of dependents, and “other information as prescribed by” regulations (Secs. 431(a) and 245(b)(2)(A)) of the Patient Protection and Affordable Care Act) (purportedly to verify new tax credits for those who cannot afford to pay health premiums). Also, the Social Security Administration can obtain from the IRS tax data on anyone who may be eligible for the low-income drug subsidy under Obamacare (Sec. 1801(a) of the Act). In sum, tax information is no longer confined to the IRS; it will be shared with certain other government agencies.

In this environment of increasing identity theft, there has to be concern about more eyes on a tax return.

3. Health care premium costs are not coming down anytime soon

The theory about the personal mandate lowering costs, if I have it correct, is that with more people being brought into the insurance pool, premiums will fall. I haven’t seen any indication of that yet. Of course, the mandate is not set to take effect until 2014, so for now the premiums for self-employed individuals and small businesses are continuing to increase.

4. There are increased tax burdens on many small business owners

Earn $200,000 in salary from your business or self-employment activities as a single person and you will pay an additional 0.9% Medicare tax starting in 2013. (The threshold for the tax for married persons filing jointly is $250,000, or $125,000 for those filing separately.) This tax is on top of the basic Medicare tax of 1.45% (or 2.9% if you’re self-employed) that you already pay, and it’s not deductible.

If you do your payroll in-house, you’ll probably have to start soon to get ready to withhold the additional Medicare tax for employees with wages over the threshold amount.

5. There’s still uncertainty

While the legal challenge to Obamacare is settled, the political challenge has just begun. If there are significant changes resulting from the November election, Obamacare may be repealed with the expectation of replacing it with another health care law. Whether there will be such a political shift, and if so, what, when, and if such new law is enacted, leaves us with uncertainty about tax-related provisions. Are current tax rules to be changed? Will good provisions in Obamacare that have already taken effect, such as coverage for a child up to age 26 on a parent’s medical plan, be retained?

Bottom line

What’s that adage about good intentions and some road? There has to be a better way to bring the cost of medical coverage down and make it available to those who are presently uninsured.

There’s been much talk about raising the income tax rates for so-called “wealthy individuals,” which has been defined by President Obama as singles with income over $200,000 and couples with income over $250,000. What has been left out of the discussion is the fact that on January 1, 2013, there will be additional taxes imposed on these individuals, regardless of any additional income tax changes that are made. These taxes were created last year by the Patient Protection and Affordable Care Act as a way to help pay for more than half of “Obamacare.”

Additional Medicare tax for earners
Starting in 2013, there will be a 0.9% tax on wages and net earnings from self-employment of “high-income taxpayers.” These are single filers with modified adjusted gross income (MAGI) over $200,000, joint filers with MAGI over $250,000, and married persons filing separately with MAGI over $125,000; only earnings over these limits are subject to the additional tax.

This tax is in addition to the regular Medicare tax of 1.45% for employees and 2.9% for self-employed individuals. But there are differences between the basic Medicare and additional Medicare taxes:

• For self-employed individuals, there is no deduction for one-half of the additional Medicare tax as there is for one-half of the basic Medicare tax.
• For married couples, while the basic Medicare tax is levied on each spouse’s earnings, the additional Medicare tax is on their combined earnings.
• For employers, the obligation to withhold the additional Medicare tax only applies if the employee’s wages from an employer exceed the applicable limit, while for the basic Medicare tax there is mandatory withholding on all earnings from an employer.

All individuals will have to take the additional Medicare tax into account in figuring withholding and estimated taxes. Underpaying can result in estimated tax penalties.

Additional Medicare tax on investment income
In addition to the extra Medicare tax on earnings, there will be a 3.8% additional Medicare tax on certain unearned income. The additional tax will be levied on the lesser of net investment income or MAGI over $200,000 for singles, $250,000 for joint filers, and $125,000 for married persons filing separately.

Net investment income is the difference between certain income—interest, dividends, annuities, royalties, rents (other than derived from a business), and other income from a passive activity, and deductions related to investment income. Gain on the sale of a principal residence that is excludable ($250,000 for singles and $500,000 for joint filers) is not treated as investment income for this purpose.

Again individuals will have to take the additional Medicare tax into account in figuring withholding and estimated taxes. Underpaying can result in estimated tax penalties.

Total tax
So what do these additional taxes amount to? An estimated $210 billion over 10 years! For small business owners, it means more taxes, which translates into less money available for hiring, capital investments, and business growth. Don’t let these additional taxes be left out of the discussion about the “fairness” of wealthy people paying a higher tax rate. And don’t let these additional taxes be overlooked in efforts to repeal parts of Obamacare. The Small Business Health Relief Act introduced on May 23, 2010, would repeal certain aspects of Obamacare and make other changes; it does not address the additional Medicare taxes poised to take effect in a year and a half.