With the first Democratic majority of both the House of Representatives and the United States Senate since 1994, many small business owners and advocates are unsure how this administration and Congress may affect the small-business economy in the years ahead.
“With a Democratic Congress and Republican administration, there probably won’t be too many changes with the 110th Congress, as far as small business legislation goes,” says Gary Storie, a wealth adviser and vice president for NexTier Wealth Management.
Smart Business spoke with Storie about how small business owners can best plan for potential changes and uncertainty in the political environment, at both the federal and state levels.
How can the new composition of Congress potentially affect small business owners?
Currently there are many laws in place, as a result of the Bush Administration tax cuts, that are designed to help small business owners. The problem is they are not permanent. Many are in place until the year 2010 and will require Congressional legislation to make them permanent. Many business owners fear that these temporary laws will simply expire in the year 2010, leaving them without much relief and potentially higher taxes.
A big concern for many business owners is the federal estate tax. If no further legislation is passed in 2011, deathtime exemptions will be reduced to $1 million per person, and the top tax rates will exceed 50 percent. The estate tax can create a serious liquidity crisis when a small business owner passes away, often resulting in liquidation of the business as the only option.
Additionally, the reduced 15 percent tax rate on eligible dividends and capital gains, previously scheduled to expire in 2008, has been extended through 2010. However, after 2010, new legislation will have to pass to continue these favorable tax reductions.
How can business owners prepare to deal with such tax changes?
It is difficult for business owners because there is a general level of uncertainty. As they try to plan for the future of their business, they must also try to predict the future of the general economy and potential change in laws affecting business. It is beneficial to plan for the worst-case scenario. For example, if a business owner plans to sell the business in 2011, he or she may consider moving the sale up to 2010 to take advantage of the lower capital gains tax rates.
It is important to put a plan together now so owners can take advantage of any breaks they may qualify for before such acts expire. Part of a company’s strategic plan should be to take advantage of tax breaks, health care cost reductions and expensing plans. A professional adviser should be utilized to make sure a plan is designed to take advantage of all possible breaks in this time of uncertainty.
How does expensing investments help a business and how should business owners plan to take advantage of this tax break?
Section 179 of the Internal Revenue Code allows small businesses to deduct all or part of the cost of certain qualifying property in the year it is placed in service, instead of over a specified recovery period. Enhanced Section 179 expensing now is at the base level of $100,000 with that level indexed for inflation for the last several years. However, the enhanced level is scheduled to revert back to the pre-law level of $25,000 in 2010. Small businesses should plan to take advantage of this tax deduction. For example, if a company is planning for a major computer buy in 2010, it might want to reconsider the plan and make the purchase in 2009 so it can qualify for Section 179.
What are some critical changes, other than tax relief, should business owners and advocates push to receive from Congress?
The Small Business Health Fairness Act of 2005 (H.R. 525) would make health insurance more affordable for small business owners and their employees by allowing them to band together through Small Business Health Plans.
Recent years have brought on a litigation explosion, where the typical cost of a lawsuit going to trial exceeds $100,000. In many cases, even a small lawsuit can spell doom to a small business. Through pressure from small business advocacy groups and owners, Congress needs to prioritize small business liability reform.
Why is it so important for small business owners to plan for the coming years?
Small business owners simply cannot wait until 2010 to plan for their futures they should start now. The tax relief we now enjoy could easily come to an end in a few years. A carefully designed strategic plan could save a business owner thousands of dollars, which could make or break the business in the long run.
Small businesses are extremely important to our overall economy. Small businesses create two-thirds of the new jobs in the United States, and 40 percent of the gross domestic product in the U.S. comes from small businesses.
GARY STORIE, MBA, MS, CFP, is a wealth adviser and vice president for NexTier Wealth Management. Reach him at firstname.lastname@example.org or (888) 262-6331.