The Real Business Impact of the Fiscal Cliff

The notorious fiscal cliff has come and gone, with Congress and the President finally reaching some common ground. However, much of the talk of what both sides said they wanted to achieve actually fell to the wayside.

Here’s what someone with an MBA degree should know about the impact, as it could greatly affect strategic decisions.

Middle class gets whacked
Most of the pre-vote rhetoric was about sparing the middle class. However, that didn’t actually happen. Yes, the vote did avoid a shift to pre-Bush tax rates except for top earners, like couples making more than $450,000 a year.

But most members of the middle class will see more taken out of their paychecks because a 2 percent payroll tax reduction expired. As people have slightly less money, they may have less confidence in the economy and spend less, at least in the short term. But over time, they will likely become accustomed to their new take-home amounts, just as they became accustomed to the temporary reduction in payroll taxes.

All that said, some may experience an effective tax reduction to at least partly offset the payroll rise. The IRS has revised the tax tables for annual inflation adjustments. The thresholds for marginal rates increase by about 2.6 percent.

Those in the middle class who don’t see a significant rise in income might actually see slightly lower taxes because a bit more of their money falls into lower brackets. So, plan on the potential for a short term impact on purchasing, if you deal with consumers, which will probably evaporate over time.

Corporate tax breaks
The better news for companies is that many corporate tax breaks survived the fiscal cliff negotiations. For example, the deal kept deferrals on foreign income as well as the R&D tax credit, both of which are used heavily in some industries like high tech. Other industries also saw breaks extended. For example, there are special treatments for film production costs that benefit Hollywood.

Alternative energy producers also get $18.1 billion in breaks. There is an estimated $330 million for railroads and $220 million for rum producers. Some tax break extensions are more narrow in focus. A $62 million break for doing business in American Samoa is really targeted at canned fish producer Star-Kist. Nascar gets $78 million in subsidies over 10 years for racetrack construction.

Small businesses also get their share of tax break extensions. Section 179 expensing, which allows companies to immediately recognize the cost of many types of capital investments, rather than depreciating them over time, retains higher thresholds with a $500,000 limit extended through 2013. By depreciating capital expenses over a shorter period of time, companies not only keep more money to reinvest in operations, but also have an incentive to make further capital investments that they otherwise might have.

Some types of improvements to property get a 15-year depreciation rather than the former 39 years. Another popular tax break, particularly among smaller companies, was accelerated depreciation, which has been extended. Certain types of investments not covered under section 179 are eligible for a 50 percent write-off in the first year of use. And companies large and small can benefit from tax credits for hiring veterans or specific disadvantaged groups.

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