Fiscal Cliff Resolution – Impact on Small Business

There was a last-minute resolution to the fiscal cliff, but it was not necessarily a very permanent one.

The fiscal cliff was composed of three separate issues:

  1. Tax things that had been set up for expiration.
  2. There was a deal made in 2011 in order to raise the official legal debt limit for the U.S. government. Part of the deal was that they needed to find certain spending cuts but those spending cuts never happened, and that created this thing called sequestration.
  3. We reached the legal debt limit.

The tax problems were, for the most part, permanently solved. There was a permanent raise of previously lowered rates of the Social Security tax, lowering of income tax rates (income tax) and capital gains rates, amongst others, as well as the temporary lowering of dividend tax rates.

All of these tax issues were addressed, and permanently. That’s certainly for the good of all, and removes uncertainty, albeit at the expense of permanently higher taxes on capital.

The sequestration issue was kicked down the road by 60 days.

The debt limit problem was also kicked down the road for 60 days, but in a rather unpleasant way. Congress basically told the Treasury to suck it up and figure out how to not exceed the debt limit. So the Treasury Department is now doing some accounting maneuvers so that we don’t exceed the legally authorized debt limit—at least until February or March.

So basically what’s really happened is that the outgoing Congress—including a bunch of people who lost their jobs from being voted out of office—have solved one-third of the problem, and left it up to the new Congress to try and solve the rest of it. Including finding some spending cuts so they can try to get the deficit under control.

From a small business standpoint, there was both good news and bad news. The bad news is that if you’re a successful small business earning in the upper tiers, you took it on the chin. They raised the tax rates, raised rates on capital gains, raised rates on dividend income and they raised the rates on large estates.

Although they did extend a number of things like long-term unemployment insurance, they cut out the “social security tax holiday,” which means that everybody will see a tax increase. Taxing a recession economy was one thing we were all trying to avoid. So they didn’t get that solved as completely as we would have liked.

The other big impact on small business is that because they did not solve the sequestration issue, the willingness of budget officials to commit to contract programs is still in doubt. There is uncertainty as to how the budgets will be adjusted once this crisis is solved, if it is solved. If it is not solved, we know there will be some drastic cuts in March. And with only seven months left in the fiscal year to spread the cuts, they will be even more severe. All of this means that it could be more difficult to keep, extend or get new contracts with the federal government.

The good news? Well, they did solve most of the tax problems.

So was Section 1611 included in the NDAA so that mid-tier businesses would be protected from competing against industry giants? No. It was modified from a pilot program – that the Defense Department and others could actually implement – to a study. There is no authorization at this point to actually create a mid-tier, so we’ll just have to wait and see what the study reveals.

The government had been hearing mixed messages, since large businesses—as can be expected—were opposed to the idea of protecting the larger small businesses. The government wants to weigh out all aspects of the issue and investigate whether this move will have a positive impact on jobs and on the country’s economy.

The study results are due to come back by the end of 2013, so by the 2014 legislative session we’ll be able to put this forth again. This is good news, because the fact that they are studying it means they recognize it’s an issue and they want to know more about it.


css.php