Dubious deal? Small biz mixed on cliff compromise

Published on NewsOK Modified: January 2, 2013 at 4:16 pm •  Published: January 2, 2013
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NEW YORK (AP) — Congress stopped the country from going over the so-called "fiscal cliff" — and that's great news for some small business owners. But with a deal that doesn't immediately address federal budget cuts, for many, the uncertainty drags on.

The compromise bill that passed the House late Tuesday raises taxes on couples earnings $450,000 or more and individuals earning at least $400,000. That affects small company owners who report their companies' income on their personal 1040 returns. Democrats and small business lobbying groups had estimated that just 5 percent of owners would have paid higher taxes under President Obama's proposal to raise rates on couples earning $250,000 or more, and individuals earning at least $200,000. The number of owners who will pay higher taxes now is likely to be even less than those estimates.

"That will help out tremendously," says Nate Nelson, who owns a medical testing company, Frontera Strategies, based in Dallas. He sets aside money to pay his taxes, and the higher threshold means he may have more cash available to make two hires and $80,000 in equipment purchases he's been putting off.

"It will help us loosen the belt a little," Nelson says.

The bill avoids widespread tax increases, but it delays deciding on for two months about spending cuts that could be deep. Companies that benefit from government contracts — whether they work directly for the government or do business with companies that contract with the government — still don't know how they might be affected by cuts in defense and other federal programs. Without the cliff compromise, the Pentagon and numerous federal agencies would have been subject to billions in budget cuts as early as this month. Cuts are still expected but it's unclear where, or how much, they will be.

Kaney Aerospace, an engineering services company in Rockford, Ill., does business with federal contractors. If the government cuts their business, owner Jeff Kaney expects his company to be affected. He's not sure yet what the impact will be on his business.

Nelson shares some of Kaney's concern. He's worried that the budget debate could result in a reduction in Medicare reimbursements on the medical tests he provides. "It could have a detrimental effect on our business," he says.

The unknowns will lead owners to keep running their businesses conservatively, says Dennis Ceru, an adjunct professor of entrepreneurship at Babson College in Wellesley, Mass.

"The concern I see is expressed in the form of not signing longer-term leases, looking to defer expensive equipment expenditures, looking to defer hiring and using seasonal and part-time workers instead of full-time ones," he says.

Compounding owners' concerns are the weakness in the economy and the government's inability to come up with solutions to its budget problems, says Scott Meadow, a professor of entrepreneurship at the University of Chicago's Booth School of Business.