The “fiscal cliff” deal reached over the New Year’s holiday in Washington wasn’t the political grand bargain envisioned just after the November elections. In fact, it was more of a stopgap measure that kept federal income tax hikes from falling on middle-class taxpayers and which called a two-month time out on automatic spending cuts.
Still to come: Debate over across-the-board federal spending cuts that were slated to take place Jan. 1, a decision on whether or not to raise the nation’s debt limit, pursuit of comprehensive tax reform, and hard questions about how to pay for major entitlement programs such as Medicare.
In the meantime, some changes included in the American Taxpayer Relief Act of 2012 (the full name for the fiscal cliff deal) will have a direct effect on business decisions made by companies, investors, and entrepreneurs. Here are a few examples:
The federal research tax credit was extended. The credit, which had expired at the end of 2011, is used by businesses that invest in “qualified research expenditures” conducted on their own as well as some payments to universities and other qualified organizations for basic research. The tax credit has bipartisan support in Congress, mainly because it helps drive innovation. In fact, it has been extended 14 times since it was introduced in 1981 – mainly because lawmakers have agreed it works. But it’s not cheap. The Joint Committee on Taxation estimated it will cost $14.5 billion over the next 10 years.
The capital gains tax was raised for some people. Like personal income taxes, the federal tax on capital gains will rise from 15% to 20% for individuals with incomes over $400,000 and couples over $450,000. The rate remains at 15% for people below the $400,000/$450,000 thresholds, and there’s no capital gains tax for taxpayers in some lower brackets. While the average person may not shed many tears over higher capital gains taxes on the wealthy, remember it’s those individuals and families who often invest in start-up companies.
The exemption for “qualified business stock” was extended. This exemption applies to investments held five or more years in C corporations with values of less than $50 million, with some exceptions. The Angel Capital Association, which represents angel investors nationally, favored this extension because it helps investors in early-stage companies.
The deal retained small business “expensing” rules. Unless this rule had been extended through 2013, the limits for certain small business expenses – such as off-the-shelf computer software – would have been cut in half. However, 2014 will bring much lower business expensing limits unless Congress acts again. The bill also retained a recovery schedule for certain leasehold improvements, which can help some owners of commercial property.
A number of energy tax incentives were extended. Tax credits for wind energy facilities were kept alive, at least through 2013. So were credits for alternative fuel vehicle refueling property, cellulosic biofuel production, biodiesel and renewable diesel, energy-efficient new homes and appliances, and a few other categories. However, the coming debate will likely focus on what alternative energy solutions are most likely to prove economically feasible – especially at a time when new technologies are producing more oil and natural gas inside U.S. borders. At some point, entrepreneurs should know, federal tax policy will likely pick winners and losers when it comes to alternative energy production.
The excise tax on medical devices was not repealed. This is a potentially big item for Wisconsin companies and entrepreneurs because the Badger State is a leader in the production of such devices, which range in size from implants to massive medical imaging devices. Beginning Jan. 1, the Affordable Health Care Act will impose $30 billion in new taxes on medical technology companies. Industry leaders say that will stifle innovation, destroy high-tech jobs, and hurt patients. The president of the Medical Device Manufacturers Association isn’t giving up, however. “There is wide recognition that the device tax has already led to job losses and that it is (affecting) patient care, and this will continue if Congress doesn’t act quickly in 2013,” MDMA’s Mark Leahey said.
It turns out the fiscal cliff is really a series of hills and valleys, most of which will be climbed and descended as the year wears on. For businesses and taxpayers alike, it would be a bumpy trek.
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