Fiscal Cliff a Concern for Small Business Owners

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Alternative Fiscal Scenario

Without new action, a series of Federal government budget cuts and new tax hikes could come into effect automatically. Known as the fiscal cliff, small and large businesses across the country are slowing down in anticipation of what could be a huge slowdown in government spending and a massive increase in the level of taxation.

The fiscal cliff is huge for small businesses and their employees. If Congress fails to move to pass legislation overriding the automatic trigger of the fiscal cliff, a series of changes will sweep through immediately including:

1.FICA tax increase – FICA taxes, better known as Social Security taxes, would rise from their temporarily reduced rate of 13.3%, down from 15.3%. FICA taxes are especially hard on those who shop primarily at smaller, locally owned businesses – the poor and middle class, who pay FICA taxes on virtually all of their income.

2.Alternative minimum tax – Without action, the alternative minimum tax would reset to year 2000 levels, which would be a 26% drop for singles and a 40% drop for married couples. The result would be a large increase in taxation for the very wealthy, who are the consistent targets of the alternative minimum tax.

3.End of the Bush tax cuts – Unpopular as they may be, the Bush tax cuts continue to earn extensions every few years. If the fiscal cliff is left to run its course, the Bush tax cuts would automatically expire. It is believed that the end of the Bush tax cuts would have the most profound effect on high-income earners, who are disproportionately owners of well-established small businesses. Franchisees, retailers, and other small business groups are those expected to feel the worst of the tax increases.

4.Defense cuts – As much as $110 billion per year would be cut from the budget of the Department of Defense. Much of this spending flows to small and large businesses that provide goods and services to the armed forces. Many companies in the defense business have shuttered factories and laid off staff in anticipation of future weakness in their businesses. Many small businesses provide everything from canvas for military bags to food packages for soldiers deployed overseas. The Defense budget funnels into virtually every small business, as well as communities filled with small business owners.

The fiscal cliff may be one of the biggest concerns to the small business community in quite some time. A combination of lower government spending and greatly increased taxes hits small business owners the hardest. For example, a FICA tax increase would be hardest on minimum wage earners, who would see a 2% reduction in their post-tax income. That kind of large scale drop in American spending power has the potential to make or break many retail businesses.

Small and large businesses alike typically seek out new sources of capital before a well-known reduction in government spending. Open-ended lines of credit – and even small business credit cards – become a lifeline to meet obligations in the event the amount of government spending is decreased, and tax rates move higher.

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