Capitol Hill Update: Fiscal Cliff

January 1, 2013

By Ralph E. Winnie, Jr., National Correspondent, Federal Allies News

 

Update on Fiscal Cliff and What it Means for Small Business: According to President Barack Obama, an agreement to avert the fiscal cliff of automatic tax increases and spending cuts appeared to be “within sight”. As per remarks made by Senator Mitch McConnell, Senators were very close to a deal, having worked out an agreement on taxes. However, according to members of Congress, the House of Representatives will not be voting on any plans to avert the fiscal cliff tonight. The impact on small business could be substantial depending on the kind of deal reached between the two parties. The Democrats have agreed to raise the income threshold for tax increases to $450,000 a year (couples) from the prior $250,000, While the Republicans are insisting on a $550,000 threshold, arguably this might be considered a substantial tax cut for the majority of Americans, including many small and medium size enterprises relative to the rates that would otherwise take effect on January 1st. The Democrats have insisted on raising capital gains and dividend taxes to 20% on households over $250,000 and reducing some of the allowable deductions. While it may boost dividend taxes to 40% on incomes over $250,000, the impact on small business will have to be closely examined over the next couple of months to evaluate its impact and to determine what recommendations Federal Allies could provide to its membership. The Democrats have agreed with the Republicans to keep the threshold for taxable estates at 5 million with a tax rate of 35% above that level. It can be argued that this is a massive tax cut over current law in which the threshold will drop to 1 million at a much higher rate. Given that it can be argued that the latest proposal by the Democrats would permanently protect middle-class households from the Alternative Minimum Tax, this would have a significant affect on the operation and profitability of small and medium size enterprise. More details to follow in the coming month as neither party has initially laid out details on how this would work. Federal Allies is dedicated to providing guidance to its membership on how these new rules will operate. Given that the Democrats’ offer would delay the “Sequester” until 2015, the cost would be an estimated 200 billion. This would avoid the cuts to the military budget that Republicans want to avoid since they insist that these cuts would ultimately impact small and medium sized companies involved in defense contracting and procurement. Federal Allies remains committed to all of its members that it will closely monitor the sequester debate and how it will impact small business procurement in the next few months. The Republicans want current spending cuts to offset the postponement of the sequester spending cuts. This postponement will cost 200 uillion over two years and the postponement of the cuts will avoid a shock to an already weak economy. On the tax side, the United States will be getting a massive tax cut that will take place on January 1st. The current low income and investment tax rates for 98% of the country, including the majority of small and medium size enterprises would be extended. Both Republicans and Democrats are debating whether the threshold for a modest income tax increase should be $450,000 or $550,000 and the impact on small and medium size enterprises. Finally, The proposed deal appears to be a benefit to the economy as the postponement of most of the tax hikes under the sequester, as well as the spending increases, would preserve the status quo and appear not to severely hamper small and medium size enterprises in their effort to grow. While the deal would likely boost the deficit over the next two years, neither the Republicans or the Democrats maintain that the Fiscal Cliff would be an acceptable alternative to these proposals.