How The Fiscal Cliff Will and Will Not Affect Your Business

If you’ve turned on the news in the last month, there’s a good chance that you’ve heard at least something about the fiscal cliff. While almost everyone’s heard the term, many people do not understand exactly what it was or how it could impact them. How exactly will the fiscal cliff issue affect you and your business?

What is the Fiscal Cliff?

The term “fiscal cliff” was originally coined by Federal Reserve Chairman Ben Bernanke in regards to the current situation, “fiscal cliff” was used to describe the situation that would occur on January 1st, 2013 if Congress did not act. On this date, the Bush era tax cuts were scheduled to expire, which would have driven tax rates up on everyone. At the same time, sequestration would kick in and cuts would be made from Federal spending. This combination of spending cuts and higher tax rates was touted as a potential problem for a stagnating economy that hasn’t been able to shake off the rust from the financial meltdown of 2008 and beyond. What the media and most of Congress failed to mention that the “cuts” everyone was talking about was a cut from baseline budgeting. This means that every year, the budget automatically increases. The “cuts” would have simply been a cut from this increased budget, which would have still been more than the government spent last year. The thought that a country could fall off of a fiscal cliff if it only spent slightly more than it did last year is interesting indeed.

Higher Taxes

Although Congress’s actions did make the Bush era tax cuts permanent for moderate and low income families, it raised taxes on high-income individuals. This means that if you are a business owner who earns more than $400,000 per year, your marginal tax rate is going up. At the same time, the payroll tax cuts expired and were not renewed with the fiscal cliff deal. This means that you’ll have to withhold more money out of your employee’s checks to be able to pay payroll taxes.

Tax Incentives

The fiscal cliff deal also had a chance to impact some of the tax incentives that businesses took advantage of over the years. Bonus depreciation was extended for this year, as well as the ability to expense certain purchases under Section 179. Businesses can still take deductions on many of the things that they are used to. For example, if you do a 0% balance transfers on a business credit card and then eventually start paying interest, you can deduct the interest that you pay.

Long-Term Impact

Although the media and most of Congress is touting the deal as saving the economy, the long-term implications of the fiscal cliff situation don’t look great. The national debt has exceeded the GDP of the country and it’s getting worse every day. Most people agree that the debt is a huge problem, but even cutting a very small percentage of spending that’s scheduled to increase is seen as falling off a fiscal cliff. If something doesn’t change to the way Washington works soon, businesses may not have the rosiest outlook on the future.

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