Small Business

For small businesses, a road without a map

Conrad De Aenlle

Last year, owners of small businesses had to cope with higher tax rates. This year, they will wrestle with greater uncertainty about the fate of some deductions they have come to rely on.

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Congress has not renewed the so-called extenders, about four dozen provisions in the Internal Revenue Code that permit write-offs of various types of business expenditures and expire periodically, most recently at the end of 2013. Most or all of them could be reinstated, although no vote has been scheduled. Unless and until they are, tax specialists warn, it will be hard for business owners to make informed decisions about spending for capital equipment, research and development, and even new employees.

"The extenders didn't get extended," said Kate Barton, vice chairwoman for tax services at the Americas tax practice of Ernst & Young. "Every company in the United States right now has to plan for 2014 without the research credit, the Work Opportunity Tax Credit and a whole bunch of other provisions. It's a real bummer for small companies."

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The first credit is for part of expenditures on qualified research and development. The second is for a part of the wages of new employees drawn from certain segments of society, including military veterans, welfare recipients and ex-felons.

Also left unextended is the $500,000 ceiling on the Section 179 expense election. This provision has allowed businesses to write off capital expenditures in the year they were incurred, up to that amount, instead of depreciating them over several years. Without an extension, the ceiling falls to $25,000.

Tax returns for 2013 aren't affected by the expirations of these extenders. But returns for future years will be, unless Congress acts. Will the provisions be renewed?

"That's the zillion-dollar question," Ms. Barton said. "They have in the past, but there's a lot of politics involved. There could be piecemeal tax reform that affects the extenders."

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A widely shared goal in Washington is to lower corporate tax rates and recoup the potential lost revenue by removing many business deductions, such as the ones in the extenders. This would broaden the tax base, but an overhaul of corporate taxation remains elusive because businesses like the write-offs, use them liberally and are not afraid to tell their elected representatives how they feel.

"It's probably the foggiest it's ever been as to whether they will be extended and at what cost," Ms. Barton said. "We probably won't know until late in the year. They could skip a year and do it retroactively."

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That would repeat what played out starting two years ago. Businesses went through 2012 with the extenders unextended. They were continued a year ago for 2012 and 2013.

Chris Whitcomb, tax counsel for the National Federation of Independent Business, acknowledged that business-friendly provisions are often reinstated retroactively, but he emphasized that this isn't the same as being able to count on them all along.

"The frustration we hear from our members is over the unpredictability of measures that might get extended," Mr. Whitcomb said. "The more predictability and permanence there is in the tax code, the better. Tax provisions that encourage investing more capital would be ideally done permanently."

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He was referring above all to the Section 179 election. "Businesses have some leeway for a few months," he said, "but the longer you wait on things like capital expenditure, the harder it is to plan."

That has been the experience of Doug Click, president of Arizona Hi-Lift. The company, in Phoenix, rents out equipment for working in places like tall buildings and cellphone towers—"cherry pickers on steroids," as Mr. Click describes it. If the $500,000 limit on the Section 179 provision is not reinstated, his capital-spending plans may be crimped.

"The last couple of years we have utilized 179 as the economy has recovered," he said. "It's a great help having that when you buy pieces of capital equipment, as I do."

Without the Section 179 provision, which he has used to the maximum in recent years, he would have to pay for the equipment up front and write it off over five to seven years. "That's very difficult for a small business to pull off," he said, especially with credit hard to come by since the 2008 financial crisis.

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Other tax-code changes are also facing small businesses in 2014. Some work in their favor; others not so much.

Bonus depreciation, which has allowed businesses to write off at an accelerated rate the cost of property beyond the amount that could be deducted using the Section 179 election, was also not extended. The same goes for a clause in the bonus depreciation rules allowing an additional $8,000 to be deducted on the purchase of a new vehicle.

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If you have a gain from sales of qualified small-business stocks, you were able until Dec. 31 to exclude all of it from capital-gains taxation. This year, that gets cut in half.

More than a dozen states, including New York and New Jersey, have increased the amount of an employee's income that the employer must contribute to the fund used to pay unemployment benefits. The first $10,300 of a New Yorker's wages, up from $8,500, will be subject to state unemployment tax, which is assessed at rates from 2.025 percent to 9.825 percent. For New Jersey employees, the increase is to $31,500 from $30,900, and the tax rates are from 0.6 percent to 6.4 percent.

On the bright side for small businesses, the tax credit available to those that have 25 or fewer full-time employees and pay at least half of their health insurance premiums rises to 50 percent of the amount paid, from 35 percent.

Another break comes in a change in rules governing tangible property. Expenditures for replacing roofs, repaving driveways and the like will be considered as repairs that can be deducted immediately rather than as property improvements that must be amortized over years.

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Small businesses may get more good news if Congress reinstates the extenders. Until then, Ms. Barton expects these businesses to remain cautious and to assume that no news is bad news. She also warns that if the provisions are not extended, the damage will go beyond the businesses that hope to use them.

"Most companies are not factoring in the credits and are making capital-investment decisions" as if the credits are not there, she said. The lack of clarity "makes it very difficult to do tax planning, and it doesn't help from an overall economic perspective to have a chunk of the Internal Revenue Code expire like this."

—By Conrad De Aenlle, The New York Times