A number of small businesses will see their tax rates rise as a result of the fiscal cliff deal passed on January 1. The deal didn’t change the corporate tax rate.
But many small businesses are structures as S-Corp’s or partnerships where the partners each pay taxes according to their partnership split.
That means small businesses with as few as 36 employees and revenues as low as $10 million could easily see their owners step over the $400,000 income threshold.
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For many, converting to a C-Corp is not an option because the partners would then be taxed both at the corporate and individual levels, doubling their tax liability.
In an S-Corp or LLC, taxation flows through the business and owners are taxed only at the individual level.
Cutting employees is likely not an option because many small businesses trimmed their staffs as a result of the recession.
Moving off shore incurs steep legal fees.
Small businesses will also have to deal with the increase in healthcare costs if they have 50 or more employees.
But they may also benefit from easier access to capital due to the JOBS Act which allows them to sell equity in their companies online. Of course, that is subject to the SEC actually implementing that rule.
All in all, if you have clients who own small businesses, it would be a great time to review
their situations with them and explain their options under the new tax law. They may need to adjust their personal investment, tax planning, and retirement strategies, too.