The fiscal cliff has been avoided but there are new pieces of legislation that small business owners should be aware of. What has been passed and what does it mean for your business?

With the implementation of the American Taxpayer Relief Act of 2012 this January, Congress avoided, at least temporarily, the so-called fiscal cliff.

Despite the avoidance, the legislation, along with the Patient Protection and Affordable Care Act (PPACA), is posing financial challenges for some HVAC business owners. Those affected now face higher income and payroll taxes, increased health care costs for employees, and potentially higher taxes if the last in, first out (LIFO) method for determining book income and tax liability is repealed.

SOME CERTAINTY

Jon Melchi, director of government affairs for Heating, Air-conditioning & Refrigeration Distributors International (HARDI), said the fiscal cliff legislation unfairly burdens small businesses that are already struggling financially.

“It raised payroll taxes immediately, and for a lot of our businesses, the owners also saw their own income taxes increase,” Melchi explained. “A large percentage of our members who own businesses and who pay taxes at the individual rate will now be paying taxes with money that would otherwise have been reinvested in their own business.”

Still, knowing what the tax rates will be for the foreseeable future, even if they are higher, allows business owners to plan and budget accordingly, Melchi said. “What the bill does is provide us some long-term certainty.”

Russel TumSuden, CFO for Sid Harvey Industries Inc., Garden City, N.Y., said his employees are affected by the fiscal cliff deal more directly than the business itself.

“From a taxation point of view, we come out better because we’re able to deduct more equipment now,” he said.

But according to John Rynecki, senior vice president of sales and marketing for Sid Harvey, it’s the employees that are the most vital part of the company. Rynecki pointed out that the company’s main focus is how the fiscal cliff deal will affect employees, some of whom may soon find themselves more financially strained than ever before due to higher taxes.

“If their life is impacted by legislation like this, how does that translate to their job?” Rynecki said.

AFFORDABLE HEALTH CARE?

Signed into law three years ago by President Barack Obama, the PPACA, more commonly known as the health care law, aims to decrease the number of uninsured Americans and lower the overall cost of health care in the U.S. It is being implemented in phases, and on Jan. 1, 2014, the individual requirement to buy health insurance will kick in, as will the employer’s responsibility to offer affordable coverage.

But health care costs for some business owners have already risen. At the same time, some regulations have yet to be written, which has created an atmosphere of uncertainty for many HVAC businesses.

Charlie McCrudden, vice president of government relations for the Air Conditioning Contractors of America (ACCA), said a lot of business owners are being left in the lurch until later this year, when they will learn what qualifies as the minimum amount of coverage under PPACA.

“There may be some employers out there who find out the coverage they offer now doesn’t meet the essential benefit package standard. This means they’ll have to upgrade, and they may have to pay more,” McCrudden said. “It could also mean they lose the grandfather status that allows them to continue offering the coverage they’ve been offering.”

“Salaries and benefits are two of the largest expenses that a distributorship has,” according to Melchi. “There are a lot of taxes associated with the Patient Protection and Affordable Care Act that are all beginning this year.”

Rynecki said Sid Harvey, like many other companies, is concerned about the health care legislation. “I think the unknown right now is the scariest part. Hopefully the outcome isn’t as bad as our imagination might lead us to believe, but who could say? It could be even worse,” he said. “I don’t think anybody feels really comfortable, or feels like they clearly understand what the outcome is going to be.”

“It’s unfortunate because you don’t know what kind of benefits your employees will get,” Melchi agreed. “It hurts those companies that want to retain employees. It’s challenging, to say the least.”

MORE TAXES

In addition to the uncertainty, McCrudden said two new tax changes associated with the PPACA went into effect on Jan. 1, 2013. The Hospital Insurance (HI) Trust Fund tax increased, and the Net Investment Income Tax (NIIT), an Unearned Income Medicare Contribution (UMC) tax, was established.

The HI portion of the payroll tax increased 0.9 percent from 1.45 to 2.35 percent on wages or self-employment income over $200,000 for individuals and $250,000 for a joint return.

The newly-established NIIT applies a 3.8 percent tax to an individual’s net investment income - the income earned through interest, dividends, rent, property sale, royalties, and gross income from a trade or business. The NIIT does not apply on modified adjusted gross income less than $250,000 for those filing jointly and $200,000 for an individual return.

“The income tax increase is something we’re not happy about,” said Melchi. “What you’re seeing is a big difference in tax liabilities for many of our members, which is never something that we want to see.”

THE DEATH OF LIFO?

Potentially adding to the financial hardship of some businesses is the possible repeal of LIFO. This accounting method assumes a business will sell its most recently acquired inventory first, which provides “a tax benefit for a taxpayer facing rising inventory costs, since the cost of goods sold under this method is based on more recent, higher inventory values, resulting in lower taxable income,” according to www.whitehouse.gov.

Repeal of LIFO is included in the Obama administration’s Fiscal Year 2013 revenue proposals, which Melchi said poses a threat to business owners.

“The President has proposed repealing LIFO in every one of his budgets,” Melchi said. “That would hit many of our members in a negative way, so that’s something we’re going to be watching.”

THE SILVER LINING

While the American Taxpayer Relief Act and the PPACA are increasing financial stress on many business owners, there is at least one victory to be recognized.

The temporary estate tax provisions enacted in 2010 were made permanent on Jan. 1 with a $5 million exemption adjusted for inflation. The top tax rate was set at 40 percent for estates valued at $1 million or more over the $5 million exemption.

“I wanted a full repeal; we didn’t get it. But to get a long-term fix and to have it indexed for inflation, along with some of the other bells and whistles, I think it’s a victory, for sure,” noted Melchi. “Our members won’t have to guess on a year-to-year basis how they’ll have to do their estate planning. It’s something HARDI has advocated for.”

However, Melchi said he would rather see the estate tax disappear altogether. “What this tax is trying to do in the name of fairness actually hurts small businesses.”

Rynecki agreed.

“Clearly, a lot of the businesses in our industry are privately owned, and the estate tax has an impact,” he said.

“They say this is for the wealthy, but you start talking about property and inventory, and there are a lot of folks who would disagree with the government’s definition of wealthy,” explained Melchi. “To have your heirs pay an additional tax again simply because you died is unfair. This is a double taxation – this is money the business has already paid taxes on once.”

“I always say, you shouldn’t have to meet your maker and pay the tax man on the same day,” he added. “Fundamentally, it’s something we’re just opposed to.”

Even with the estate tax exemption locked in at $5 million and indexed for inflation, Melchi said business owners in the industry have a rocky couple years ahead of them.

“The bottom line is, taxes went up on a lot of people and Washington continues to have a multi-trillion-dollar deficit,” he noted. “How often can you dip into the well?”