We are writing a series on the Presidential candidates and their tax policies. I am looking at each candidates tax policy based upon their financial impact on the small business person. In 6 days we are voting for President and it is going to be an extremely close race.
I realize I am walking a slippery slope in writing the next two newsletters because many of you have strong feelings about your candidate. However, I feel I should tell you, my readers what the tax implications of your vote may be upon the small business owner. After all, this newsletter is for the small business owner.
I think we all should remember that the President only signs or vetoes tax bills and influences legislation that comes from Congress. The President does not have the power to unilaterally change the tax laws. The last two years, Congress has been politically split, the House of Representatives is Republican controlled and the Senate is Democratically controlled. Both parties have significantly different ideas and view points on how taxes should be used to influence the economy. Congress is very partisan and finding solutions to the fiscal problems that they can agree upon has been impossible.
Let's first look at President Obama's Policies
President Obama's tax position is well documented. What he proposes for the next four years is in contrast with what he has signed into legislation his first four years.
President Obama's First Four Years
During his first two years, President Obama and a Democratic controlled Congress passed the Health Care Act which increased taxes on many Americans with the promise of reduced health care costs and the elimination of coverage denial for preexisting conditions. During this time he also reduced some taxes on small business owners by extending the Bush Era tax cuts and creating a few new ones. During the last two years of his current term, the House of Representatives became Republican controlled and then President Obama had to find common ground with the Republicans on which to pass any type of legislation. Congress and the President were unable to find common ground on a long term economic plan and as a result they have not passed anything but short term tax breaks and broad spending cuts. Now next year all of the tax cuts are expiring, will have expired, and big spending cuts are going into effect.
To recap, here are some of the major breaks President Obama has signed during his first four years that have been beneficial to small businesses.
- Bonus depreciation: A 50% bonus depreciation was made available by the 2008 Economic Stimulus Act signed into law by President Bush. President Obama and Congress extended the bonus depreciation provision with the "Recovery Act", and again with the "Small Business Jobs Act", then it was temporarily increased to 100% by the "2010 Tax Relief Act". It's now at 50% until the end of this year when it expires all together.
- Section 179 Expensing: During the Bush era, the amount your business could write-off increased to $250,000 with the "Stimulus Act", and President Obama and Congress extended it with the "Recovery Act". The limit was raised to $500,000 with the Small Business Jobs Act until the end of last year. Now it's back down to $139,000.
- Carryback of losses: If you had a few good taxable income years followed by an income loss, the carryback provision allows you to use your loss amount to reduce the tax from previous years, thus giving you a tax refund. The Recovery Act extended the carryback provision from two years to five, helping businesses that went into the red during the recession dip way back to the start of the economic boom. It is now back down to two years, though.
- Payroll tax exemption: In attempt to spur hiring of veterans or those with disabilities, the 2010 Hiring Incentives to Restore Employment (HIRE) Act gave companies that hire "qualified" employees a break on the Social Security payroll tax. Although this act was short lived, it was a tax benefit to businesses just the same.
- Lower estimated tax payments: Unlike everyday folks, your business must pay taxes four times a year. Small companies that are more profitable must make estimated payments that equal 100% of what they paid the previous year or risk falling short and paying penalties. The Recovery Act lowered the estimated tax to 90%. It was meant to let you hold on to more of your money throughout the year, though you still had to pay the full amount on tax day - this has long since expired.
And President Obama's Big Tax Increase
The President has had one significant tax increase......the "Health Care Act" which passed in his first two years as President. A 3.8% increase on unearned income tax on taxpayers who earn more than $200,000 (many of these people are small business owners) and a tax penalty for businesses with more than 50 employees that do not provide health insurance to their employees. Many of these taxes will begin in the next four years.
This legislation is very unpopular with the small business person. I think the lack of popularity of this legislation comes from the fact that now small business owners are paying more taxes but are not receiving what they perceive as a direct benefit from the legislation. For example, in my business, many of my employees have health insurance through their spouse's plan but we have a typical small business HSA health plan for those of us who don't have insurance elsewhere. Since the Health Care Act was passed, our premiums have risen 44% and now my taxes are going up. Almost all of my employees are covered with health insurance (89%) yet I am paying more for insurance and my taxes are increasing. Is the Health Care Act working for my business? I certainly don't see the benefit.
The theme of the next four years.......Tax Increases on Small Businesses
In the next four years, President Obama proposes to increase taxes on higher wage earners. Most small business owners pay their business taxes as part of their own income taxes. Most of the higher tax brackets are largely small business people, not big corporation executives. So the tax increases President Obama is proposing, will impact small businesses and slow their ability to grow.
- He proposes raising the top individual income tax rates from 33%-35% to 36%-39.6%;
- Increasing long term capital gains rate from 15% to 20%
- Impose the "Buffett" rule - a minimum 30% tax on high earners. This is a modified and more punitive version of the alternative minimum tax that is currently in place.
- Dividends taxed as ordinary income - this will be a tax increase on almost all taxpayers. For those at the highest tax bracket, your tax on dividends will jump from 15% to 39.6%;
- Increasing the estate tax charging any estate over $3.5 million at 45%;
These tax increases were included in the President's budget for this fiscal year, which was voted down by both the House and the Senate. I do not see his tax plan getting through Congress after the election as the Democratic Party is projected to lose more Senate seats where the balance of power will be a narrow Democratic majority and the Republicans will continue to control the House. He has very little chance of getting this legislation through a Republican controlled House.
The Fiscal Cliff is President Obama's Problem to Solve
Whether he wins the election or not, President Obama will have to deal with the fiscal cliff. If all of the budget cuts and tax increases go into effect on January 1, then the country will be plunging into a deep recession before Mitt Romney would take office, so President Obama must deal with it now. Every smart legislator in Washington knows this (maybe there aren't enough smart legislators - but that is another story).
Both political parties have such different ideas on how to handle the economy and taxes and neither one of them has a firm hold on Congress. I see the House and Senate working out a compromise they can pass and President Obama will sign it into legislation. This legislation will probably not be what is needed to fix the tax and economic problems on a long term basis. It will more than likely be another "kick the can down the road" piece of legislation, but it will at least prevent the coming recession from being a deep one.
My View of President Obama's Tax Policy
The tax bills President Obama has signed over the past four years, other than the Health Care Act, have not hurt small businesses. However, his proposal to increase taxes on the higher income individuals is going to impact small business negatively.
I know that many supporters of President Obama will say I am being harsh on their candidate. I am just calling it as I see it through the prism of my clients, the small business owner. I see the taxes they pay and their daily struggle to compete with domestic and foreign competitors, so now they need all the help they can get to make growing their businesses easier.
Tomorrow......Mitt Romney