Taxes are, historically, the number one issue business owners identify as a potential challenge to their businesses. 2014 is proving to be no exception to this rule. A number of professional surveys of small business owners, the National Federation of Independent Business (NFIB) among them, indicate uncertain tax policy and rising tax rates are at the forefront of business owners’ minds. I am not surprised. In fact, I believe this year in particular will be especially challenging for you and your business. Effective January 1, 2014, the following tax topics are affecting your business (whether you realize it or not).
Higher Tax Rates
A new top rate of 39.6% has been added for higher-income taxpayers. Previously, there were just six tax brackets: 10, 15, 25, 28, 33, and 35%.
Higher Capital Gains Rates
The tax rate for long-term capital gains and qualified dividends has been increased to 20% (up from 15%) for taxpayers with incomes exceeding the threshold for their filing status.
Net Investment Income Tax
Part of Obamacare, the Net Investment Income Tax is a surtax levied on net investment income. It is often perceived as an additional tax on higher-income taxpayers, but it can affect even those with more moderate incomes if that money comes from the sale of real estate, certain business assets, stocks, or other investments. A new Medicare tax on investment incomes adds an increase of 3.8%. The NIIT is on top of the 20% long-term capital gain tax rate now in effect for higher-income taxpayers.
Increased Payroll and Self-Employment Tax
Also part of Obamacare, higher-income taxpayers are faced with an additional 0.9% health insurance tax. This surtax is imposed upon wage earners and self-employed taxpayers whose wage and self-employment income exceeds $250,000 for married taxpayers filing jointly ($125,000 if filing separately) and $200,000 for all others.
Severe reduction of Section 179 deduction and expiration of Bonus Depreciation
The Sec 179 allowance for business equipment drops from $500,000 per year to $25,000 in 2014, and Bonus Depreciation has completely expired. The notion that Congress will extend these provisions is, in my opinion, still quite unlikely.
Obamacare mandates
While employer mandates have been postponed until 2015, the individual mandate and its associated penalties are now very much in effect. All persons, with very rare exceptions, must have minimal essential coverage, or face a penalty.
Qualified Small Business Stock Gain Exclusion
Beginning for qualified small business stock issued in 2014, the gain exclusion drops from 100% to 50%.
There is some good news to be found this year. The small business health insurance credit, the tax credit to small employers (25 of fewer FTE) that provide an affordable health insurance plan for their employees and supplement at least half the premiums, will increase to 50% of the employer’s contribution in 2014, up from 35% last year. Also, there is now a simplified home office deduction in effect. Taxpayers can now elect a simplified deduction for the business use of their home -- $5 per square foot (maximum 300 sq.ft. or $1,500). Still, 2014 is riddled with new tax laws and increases. I realize it may be tough to focus on 2014 before your 2013 taxes are complete, but you must look ahead and implement strategies to deal with these new policies. Next tax season will be here before you know it.
