written by Aaron Henry
On Tuesday evening, the House of Representatives passed the American Taxpayer Relief Act (ATRA) of 2012, essentially averting the fiscal cliff. With the passing of this bill, there is good news and bad news for small and medium sized businesses.
Let’s start with the good news. The ATRA provides greater certainty in taxes for businesses. The act also makes several previously established tax provisions permanent, including tax rates on ordinary income, estate tax, dividends, capital gains, and the alternative minimum tax (AMT). In addition, several business provisions have been extended. The Research and Development Tax Credit has been extended through 2013. This important tax credit is also retroactive for 2012. The Work Opportunity Tax Credit has also been extended for a year.
There is also good news for depreciation rules. The ATRA maintains the maximum amount of $500,000 and $2 million phase-out for 2012 and 2013. The bill allows for 50% accelerated depreciation on qualifying property purchased and placed in service before January 1, 2014.
Now, here comes the bad news. While there is greater certainty in taxes, the tax rates for top earners has increased to 39.6%. Also, do not forget the 0.9% tax increase on ordinary income over $200,000 for single filers and $250,000 for married filing jointly filers as part of the healthcare bill, commonly known as Obamacare. Since most small and medium sized businesses are pass-thru entities, the ordinary income rate greatly affects business owners. The corporate rate is not discussed in the ATRA.
The top rate on capital gains and dividends has increased to 20%. Yes, the increase is bad news; however, a rate of 39.6% had originally been proposed. This new rate is for top earners in the 39.6% tax bracket. Additionally, the new healthcare bill provides a 3.8% add-on tax for capital gains and dividends.
The $5 million per person exemption for estate taxes has been kept in place, but the top rate is now 40%. However, there is a little good news on estate taxes. Portability has been kept and estate and gift taxes remain unified, giving taxpayers the $5 million for gift tax purposes as well. These are all now permanent law.
Finally, the Bush tax cuts eliminated the phase-outs of personal exemptions and certain itemized deductions. Essentially, they are hidden marginal rate increases. However, the ATRA brings these policies back into action. They are at a higher dollar level of $250,000 for single filers and $300,000 for married filing jointly.
Much is yet to be decided in the coming months in terms of federal spending cuts and the debt ceiling. It is also important to note that the temporary payroll tax holiday has expired, increasing the rate to 6.2%. Americans can expect to see their paychecks shrink going forward, a discussion that will likely be difficult for many employers.
We welcome any questions about tax legislation for 2013. Please contact our office if we can be of any service to you 417-881-0145.
or read a more detailed guide here American Taxpayer Relief Act