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David Myers, right, of The Whitlock Co., discusses tax issues with Frank Corry, who attended an educational forum on "fiscal cliff" and health care concerns Nov. 27 at the Hilton Garden Inn.
David Myers, right, of The Whitlock Co., discusses tax issues with Frank Corry, who attended an educational forum on "fiscal cliff" and health care concerns Nov. 27 at the Hilton Garden Inn.

Business owners to combat looming tax hikes

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With tax increases on the horizon for business owners, many are weighing their options for reducing tax burdens – options that include selling their businesses – before the end of the year.

As 2012 draws to a close, concerns about tax increases and spending cuts in 2013 are impacting corporate behavior, said David Mitchell, director of the Bureau of Economic Research at Missouri State University.

Businesspeople also are fretting the economic repercussions of going over the country’s so-called fiscal cliff, he said. Mitchell pointed to the stock market as an indicator of changing behavior. The Dow Jones Industrial Average, a widely accepted indicator of the health of the overall economy, dropped 700 points in the first week after the Nov. 6 election and remains down roughly 2 percent as of Nov. 28.

Nearing the edge
In order to pass spending measures last year, Republicans and Democrats agreed on establishing a trigger that would enact steep tax increases – an end to tax cuts established by former president George W. Bush – alongside sizable spending decreases, mostly connected to the Department of Defense in the form of the Budget Control Act of 2011. According to the Congressional Budget Office, the net effect of the spending cuts and tax increases is a 2013 reduction in the federal deficit of more than $600 billion.

“The idea at the time was that it was something so big that nobody wanted it, and they would come to an agreement by then,” Mitchell said.

With a total national debt of more than $16 trillion, it seems that tax increases and spending cuts, while potentially bad for the economy, could at least address the deficit problem. Mitchell, however, thinks any savings realized would be wasted by Congress.

“I think it could be good if Congress didn’t always spend the money, but Congress always spends the money,” Mitchell said. “There is no historical record for (Congress) to save money to pay down debt except for in Colonial times.”

Virtually everyone would be affected by the “fiscal cliff.” According to the CBO, the tax increases scheduled to take place in 2013 include: child care credits, reduced to $500 per child from $1,000; payroll taxes up to 6.2 percent from 4.2 percent; Bush-era tax bracket increases at all levels, with the top income rate climbing to 39.6 percent from 35 percent; and taxing dividends as income taxes rather than capital gains, jumping the top rate to 39.6 percent from 15 percent (not including a scheduled 3.8 percent surtax on investment income).

In general, Mitchell said the tax rates in effect during Bill Clinton’s presidency would apply.

“Everybody’s taxes are subject to this. It is not just the rich,” he said.

According to a May CBO report, the fiscal cliff would likely result in a recession. The CBO estimated the economy would contract by 1.3 percent in the first half of 2013 as a result of the scheduled fiscal restraints.

But long-term debt reduction is needed, according to the CBO report: “Eliminating or reducing the fiscal restraint scheduled to occur next year without imposing comparable restraint in future years would reduce output and income in the longer run relative to what would occur if the scheduled fiscal restraint remained in place. If all current policies were extended for a prolonged period, federal debt held by the public – currently about 70 percent of (gross domestic product), its highest mark since 1950 – would continue to rise much faster than GDP. Such a path for federal debt could not be sustained indefinitely.”

Coming to terms
On Nov. 27, Springfield-based accounting firm The Whitlock Co. held an educational forum on both looming health care changes and tax increases associated with the fiscal cliff.

In all, about 100 people attended the session at Hilton Garden Inn on East Republic Road to hear what the accountants had to say about their tax options.

Certified public accountant Dave Myers, who addressed 2013 tax changes, said one thing is clear: “Taxes will go up. The best any of us can expect is the status quo. It is a tough environment.”

With federal legislators now wrestling over which tax increases to keep and which cuts to avoid, Myers said much still is not known about what will take effect in January.

One attendee, Strafford-based Hometown Disposal Inc. owner Richard Brownsberger, said he came to see if he needed to make any moves with regard to health care or taxes prior to year’s end. Brownsberger said he still didn’t know what to think.

“I think I was starting to understand what the changes could mean for my business, but there is still so much that is subject to change, I’m kind of left sitting in limbo,” he said of his 12 full-time employee-company, adding he has no plans to sell the business.

Brian Standage, a partner and investment adviser representative with Springfield-based financial planning firm Holmes & Griffeth Inc., said many investors are weighing their options ahead of 2013. He said he couldn’t cite any businesses that sold or were selling as a result of the cliff, but several business owners had inquired about tax changes beginning in the second quarter of the year and were considering the benefits of selling.

Standage said about one-third of his clients would be impacted by changes to dividend-paying stocks, which is resulting in longer conversations about individualized strategies in the lead up to Jan. 1.

He pointed out that some would be impacted more than others.

“Higher-earning investors are going to be the ones most affected by this,” Standage said. “Depending on what tax bracket you fall in, next year, that’s where your dividends will fall.”

Currently, dividends are taxed comparatively to long-term capital gains, which themselves will increase between 15 percent and 20 percent for top earners. Potentially, those with portfolios heavy in dividend-paying stocks could see their tax rates jump to more than 43 percent from 15 percent with a new surtax charge taking effect. For someone earning $500,000 in dividend income, the changes would mean paying $217,000 in taxes next year, compared to $75,000 today.

He said it is important to note the tax hikes would not impact qualified accounts such as individual retirement accounts and 401(k)s.

While many small investors might not be directly impacted by the coming changes, Standage said they could be indirectly affected by a selling spree brought on by large investors, which would put downward pressure on the market.

Mitchell said while much is still uncertain, the situation is troublesome.

“During the election, we heard people talking about a war on women and a war on the poor, but really what we have is a war on capital,” Mitchell said.[[In-content Ad]]

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