Union's Claims Over SEPTA, Port Authority Work Survive

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You're the Boss Blog: Small-Business Tax Incentives Survive the Deal

How small-business issues are shaping politics and policy.

Most of the discussion about the last-minute legislation to avert sharp tax increases for 2013 has concentrated on the Bush tax cuts — their permanent extension for most Americans and their expiration for a very few. But the bill also renews dozens of other income-tax provisions for individuals and businesses through a series of provisions that the legislating class calls “extenders.” And though advocates for small businesses were concerned that legislators might overlook their interests in the high-pressure negotiations, it turns out that their pessimism was unfounded. Nearly all of the most important provisions won a reprieve through at least this year. (It just goes to show that an old temporary tax credit almost never dies, it just becomes an extender.)

Here’s where things stand for many of the small-business tax incentives that were on the table:

•Section 179 expensing: This popular provision allows small companies to fully expense many investments in just one year, instead of over five years or more. The amount of investment eligible for immediate expensing grew to $500,000 in 2010 and 2011, but was to fall to $139,000 in 2012 and $25,000 in 2013. The new law extends the $500,000 limit through 2013, and pushes the $25,000 cap to 2014. Section 179 is available only to companies with total capital expenditures for the year under a certain threshold — $2 million through 2013 and $200,000 starting in 2014.

•Bonus depreciation: Since 2008, companies have been able to take advantage of a special depreciation allowance that allows them to write off 50 percent (and sometimes more) of certain kinds of investment in the first year. The provision was set to expire at the end of 2012, but has been extended through the end of this year, or, in some cases, through 2014.

•Research and Experimentation Tax Credit: The R&D tax credit, as it’s also known, expired at the end of 2011. The new law extends it through 2013 and increases the potential credit for businesses that acquire other companies.

•Built-in gains tax: Normally, when a company converts from a C corporation to an S corporation, it must retain its assets for at least 10 years or pay a 35-percent tax on the built-in capital gains that occurred before the company made the conversion. (The provision is intended to discourage a corporation from making the conversion simply to avoid double taxation — first at the corporate level, then at the shareholder level — on capital gains.) Since 2009, Congress has shortened the period, ultimately to five years for assets sold in 2011. The new law extends the five-year period through 2013.

•Temporary exclusion of 100 percent of gain on small-business stock: This recent stimulus provision, an incentive to invest in small companies by making the capital gains tax-free, expired at the end of 2011 but has been extended through 2013.

•Work opportunity tax credits: These are tax credits for employers who hire military veterans or people belonging to certain disadvantaged groups (for example, people receiving government assistance or living in distressed areas). Tax credits for hiring the disadvantaged expired in 2011 and those for veterans expired at the end of 2012; both have been extended through 2013.

•Fifteen-year depreciation for qualified improvements to leasehold, retail or restaurant property: Under this provision, which expired in 2011, a renter, retailer, or restaurateur can write off improvements in 15 years, rather than over 39 years (which may be longer than the business would even exist). It has been extended through 2013.

•Adjustment to stock of S corporations making charitable contributions: This temporary provision made it easier for owners of an S corporation to take deduction for making donations. It expired at the end of 2011 but now is extended through 2013.

•Enhanced charitable deduction for contribution of food inventory: This provision allowed companies to donate their inventory of “apparently wholesome food” — that’s a legal term, really — and take up to twice the deduction they would normally get. It expired in 2011, but has been extended through 2013. However, a similar provision that allowed C corporations a bigger deduction for donating computer equipment to schools and libraries was not renewed.

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Payroll Tax Cut Unlikely to Survive Into Next Year

That is when the temporary payroll tax holiday ends. Its expiration means less income in families’ pocketbooks — the tax increase would be about $95 billion in 2013 alone — at a time when the economy is little better than it was when the White House reached a deal on the tax break last year.

Independent analysts say that the expiration of the tax cut could shave as much as a percentage point off economic output in 2013, and cost the economy as many as one million jobs. That is because the typical American family had $1,000 in additional income from the lower tax.

But there is still little desire to make an extension part of the negotiations that are under way to avert the huge tax increases and across-the-board spending cuts, known as the fiscal cliff, that will start in January without a deal. For example, without any action, the Bush-era tax cuts will expire and the military and other domestic spending programs will be reduced.

“This has to be a temporary tax cut,” said Timothy F. Geithner, the Treasury secretary, testifying before the Senate Budget Committee this year and voicing the view of many in the White House and on Capitol Hill. “I don’t see any reason to consider supporting its extension.”

The White House has not pushed for an extension. “We’ll evaluate the question of whether we need to extend it at the end of the year when we’re looking at a whole range of issues,” Jay Carney, the White House press secretary, told reporters last month.

The original point of the payroll tax holiday was to stimulate consumer spending and aid middle-income households. But now Congress needs the money as it struggles with vast deficits and believes the economy can withstand the expiration.

Many Republicans vehemently opposed its passage last year, as it would divert money from the Social Security program. Many Democrats fervently supported it last year but show no such enthusiasm now. Nancy Pelosi of California, the top House Democrat, has told reporters she thinks it should expire.

Support is lacking for two main reasons. First, both Democrats and Republicans would rather focus on the broader political and economic issue of the fate of the Bush-era income tax cuts. These cuts, too, were initially meant to be temporary, but are now deeply entrenched in the tax code and central to the budget battle.

Second, though the economy has not become significantly stronger over the past year and the tax increases in addition to spending cuts coming next year could push the country into a recession, independent economists say that the economy could shoulder the payroll tax increase without undue harm.

Moody’s Analytics, for instance, estimates that expiration of the payroll tax holiday would shave 0.6 percentage point off economic growth, adjusted for inflation, in 2013 — and that the economy could safely stomach government spending cuts and tax increases totaling up to 1.5 percentage points of economic output.

Still, expiration of the payroll tax cut will increase the taxes of millions of middle-class families.

The fragile state of the recovery and the frustratingly slow growth of the economy have heightened the stakes for the end-of-year negotiations. Economists estimate that if Congress fails to forestall or unwind the spending cuts and tax increases due to take effect next year, the hit could send country back into a recession.

The Federal Reserve currently estimates that the economy will grow 2.5 to 3 percent next year, and that the unemployment rate will be 7.6 to 7.9 percent, still painfully high.

The uncertainty in the United States is “currently a threat,” said Christine Lagarde, the managing director of the International Monetary Fund, pressing Congress last week to avoid the cliff. “It’s not a threat just for the United States of America. It’s a threat for the global economy.”

Some economists have pushed for an extension of the payroll tax holiday to help support the recovery — or for its replacement with other measures to help the millions of low-income working families whose taxes will rise when it expires.

The Economic Policy Institute, a liberal Washington-based research group, for instance, has said that the payroll tax cut has a stronger stimulative effect on the economy than many other tax cuts because the working households that receive it tend to spend the money rather than save it. Thus, it estimates that the tax cut’s expiration could erase 0.9 percent of economic output and put up to a million jobs at risk.

It recommends replacing the payroll tax cut with infrastructure spending or fiscal aid to states, as a form of support for the recovery in the short term that would not have harmful long-term budget effects.

Some conservative economists have pressed for its extension as well, arguing that no Americans should have their taxes go up next year.

“Obama and Congress both need to hear this alarm clock, wake up, and get busy avoiding a payroll tax hike insult to the middle class’s injuries of stagnant wages and high unemployment,” wrote J. D. Foster, a fiscal specialist at the right-of-center Heritage Foundation.

The payroll tax holiday this year has reduced workers’ tax on wages up to $110,100 to 4.2 percent from 6.2 percent. In 2012 that translated into a $700 tax cut for a person making $35,000 a year and a $2,202 tax cut for workers making $110,100 and up.

Last winter, the White House pushed a resistant Congress hard for an extension, arguing it was needed to support the flagging recovery. The White House set up a campaign for Americans to send in stories about what they would do with the extra $40 in their paychecks, and denounced Republicans as not wanting to aid the middle class.

“For the typical American family, it is a big deal. It means $40 extra in their paycheck. And that $40 helps to pay the rent, the groceries, the rising cost of gas,” President Obama said, standing with some of the families who had sent in stories.

The other provisions at stake in the fiscal cliff negotiations overshadow the payroll tax cut.

The Congressional Budget Office has calculated that according to current law, the federal deficit would fall by more than half a trillion dollars from the 2012 fiscal year to the 2013 fiscal year. The expiration of the Bush tax cuts and other provisions would reduce the deficit by $221 billion.