Small Businesses Find Relief in Tax Bill
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New Investments Planned, Layoffs Averted
Due in part to a strong lobbying and grassroots campaign orchestrated by the U.S. Chamber, Congress passed and President Obama signed into law a comprehensive tax package that stopped job-killing tax hikes scheduled for January 1, 2011.
Potential hikes on marginal income, dividend, and capital gains tax rates spurred the largest Chamber grassroots mobilization since the health care debate. Over the course of months, the Chamber generated more than 200,000 letters to Congress urging lawmakers to extend the 2001 and 2003 tax rates— more congressional contacts than in all of 2008.
In addition, the Chamber led delegations of small business owners to Capitol Hill to lobby for the legislation and whipped up support through the web with online forums and blog posts, among other tactics. Chamber staff appeared regularly in the national media to make the case for an extension of the tax rates.
"The intention of this legislation is to spur the economy, and without question, we'll be taking advantage of that," says Ryan Robinson of Siganl Metal Industries.
Signal Metal Industries
Ryan Robinson, president and co-owner
Even as he’s preparing to write a check for his 2010 taxes, Ryan Robinson of Signal Metal Industries in Irving, Texas, is looking ahead to making several big purchases in 2011.
“My tax guys have been talking to me a lot over the last couple of days about how good this is going to be, specifically for Signal Metal Industries, given what we’re doing right now. So we’re really excited about it. It’s a game changer for tax planning for 2011,” says Robinson.
Robinson is among the estimated 2 million businesses poised to take advantage of the 100% expensing provision in the tax law that passed at the end of last year. It allows businesses in 2011 to fully write off productive capital investments such as delivery trucks and machines immediately, rather than depreciate the cost over a period of years.
Robinson is building a second plant for Signal Metal Industries, a second-generation family-owned business that designs and builds heavy equipment for the steelmaking and mining industries. “The bill helped us make a decision to buy one particular machine tool that costs over $250,000, and now we’re moving forward right away on two other machine tools that are important for our business,” he says.
The combined price tag for Robinson’s list tops $1.5 million, a sizable chunk for the 180-employee company. “There’s no question that this legislation will change our behavior,” he says. The tax-deductible portion of capital investments will return to 50% in 2012. “The lesson here is if you ever think you’re going to buy it, buy it this year,” says Robinson.
"Getting the 55% [death tax] rate off the table is a good start. It gives us some breathing room," says Peter Gunnerman of Advanced Refining Concepts. Also pictured here is Peter's father, Rudolf.
Advanced Refining Concepts, LLC
Peter Gunnerman, partner
Green fuel developer Peter Gunnerman is breathing a sigh of relief. Gunnerman was among the many family business owners who anxiously awaited action on estate tax laws from a lame-duck Congress.
Gunnerman, who owns Advanced Refining Concepts in Sparks, Nevada, with his 82-year old father, Rudolf, worried that he would be forced to close the family business if his father passed away in 2011. That’s because the federal estate tax was scheduled to soar from zero in 2010 to the pre-2001 rate of 55%. In December, however, Congress passed compromise legislation that lowers the rate to 35% and exempts estates valued at less than $5 million.
Having to pay an estate tax rate of 55% “would mean that everything—this business that we’ve put our family fortunes into—would basically disappear,” says Gunnerman. “I would absolutely not have the ability to pay that kind of tax bill.” Gunnerman says he dreaded the thought of having to sell the company and lay off his 22 employees.
The new law protects successful small business owners and families from estate tax levels that threatened the continuation of many family businesses and provides some estate planning certainty for business owners like the Gunnermans. “He professes he’ll live to 120-years-old, and I believe him,” Gunnerman says about his father, “but we have to be able to plan for anything.”
David Adante (right) of the Davey Tree Expert Company says that extending the tax rates protects the retirement assets of employees, including Boyd Moore's
The Davey Tree Expert Company
David Adante, executive vice president & CFO
As an employer, David Adante was very pleased to be able to deliver good news to his employees and shareholders last Christmas—taxes on their company’s stock dividends and gains made from the sale of company stock would not rise in 2011 because of legislation passed by Congress just before the holiday.
The Kent, Ohio-based Davey Tree Expert Company, which provides residential and commercial tree and landscape services, has been 100% employee owned since 1979. As an employee stock ownership plan company, or ESOP, the company pays annual dividends to its 6,000 shareholders, many of whom are retired employees. In 2009, the company paid shareholders 17 cents per share, which equaled approximately 18% of its net income.
Those current and former employees would have taken a huge tax hit if Congress and the administration had not agreed to extend the current dividend tax rates for two more years, according to Adante. “Their taxes would have gone from 15% to up to 39.6% because their dividends would have been taxed as ordinary income.”
Taxes on profits from the sale of company stock held more than a year also were scheduled to rise in 2011, but the new law extends current capital gains tax rates for two years. “Since we’re an ESOP, a lot of former employees’ retirement assets are tied up in the company stock, and they’re deriving their income from dividends or capital gains,” says Adante. “Going from a 15% capital gains tax to 20% is a big deal for them.”
Adante points out that the 2 percentage point reduction in the employee Social Security tax will enable Davey Tree employees to take home a little extra income.
What the Tax Bill Means to You
Marginal tax rates: Current tax rates remain in place through 2012. Without the legislation, all individual marginal tax rates would have increased.
Payroll tax holiday: For 2011, the 6.2% Social Security payroll tax is reduced for all employees by 2 percentage points to 4.2%. Social Security payroll taxes for the self-employed who pay both the employee and the employer portions (e.g., sole proprietors) will likely be cut from 12.4% to 10.4%.
Alternative minimum tax: For 2010, the AMT is indexed to inflation so
that as many as 21 million households will not have to pay it.
Investment taxes: The 15% rate on capital gains and qualified dividends is maintained through 2012.
Estate tax: For 2010 through 2012, estates worth more than $5 million will be subject to a 35% tax. Without legislation, estates valued at more than $1 million would have been subject to a maximum tax rate of 55%.
Tax credits for business: The legislation provides for extension of 50% bonus depreciation and small business expensing through 2012 and a 100% expensing allowance for property placed in service after September 8, 2010, through 2011. The research and development tax credit and other tax incentives have been extended through 2011.