NEW YORK — 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 earning $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,” said 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,” he said.
The bill avoids widespread tax increases, but it delays for two months decisions about spending cuts that could be deep. Companies that benefit from government contracts still don't know how they might be affected. Without the “cliff” compromise, the Pentagon and numerous federal agencies would have been subject to billions in budget cuts as early as this month.
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.
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 said.
The unknowns will lead owners to keep running their businesses conservatively, said 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 said.
Compounding owners' concerns are the weakness in the economy and the government's inability to come up with solutions to its budget problems, said Scott Meadow, a professor of entrepreneurship at the University of Chicago's Booth School of Business.
“All of those things are kind of the foundation of this anxiety that's out there: When is the sword going to fall, what is the effect going to be?” he said. “It's that anxiety that causes (a small business owner) to slow down.”
That means 2013 is likely to look a lot like 2012 for small businesses, said Kathleen Allen, a professor of entrepreneurship at the University of Southern California Marshall School of Business. “I don't think that this kind of uncertainty and volatility is going to change anytime soon,” she said.