GARNER — If an accountant tells you one thing in early April, it’s this: I am very busy during early April.
If the accountant has time to tell you other things, they would say that tax law is not getting simpler, especially with health care reform. They would also say that, in North Carolina, big changes could await the next time you file your returns.
That seemingly constant stream of changes to tax code at the state and federal level often leave businesses and some individuals perplexed, and keep the accounting field more dynamic than the pop-culture monotonous numbers-nerd stereotype might indicate.
The laws passed by North Carolina’s legislature generally take effect in 2014, which mean it will be next tax season – after the fall elections – before residents first see the bottom line. But area certified public accountants say small businesses lead a group of people who might want to plan for new realities this tax year.
“There’s a lot more changes on the table in 2014 than hit in 2013,” said Leslie Merritt, a Zebulon accountant who has been a CPA for more than 30 years. “Overall it may be good for the economy. But it’s not spread to everybody. Some will be helped, some will be hurt. “
While health care reform creates a lot of chatter and major changes, multiple accountants singled out a major state-level game-changer. The General Assembly eliminated an income tax exemption for small business owners on the first $50,000 of their net income. The 2011 General Assembly passed that break as an attempted economic stimulus. Tony Pandiscia, a CPA with the Garner firm Langdon & Company, said a lot of his clients have taken advantage of the break, which he said made sense because it offers reward for the risk of a small business.
“It coincided with a lot of new start-up activity in the last two years,” he said. “I think (removing it) is going to have a little bit of a chilling effect.”
While $50,000 of tax-free profit might strike a wage-earner as unfair, Pandiscia said small businesses making that kind of money as a sole proprietorship would be likely to expand and hire more workers, helping the economy.
More broadly, the legislature lowered and flattened the state income tax rate, arguing it was too high for the region. It made back some of the lost revenue by eliminating certain exemptions to sales taxes such as live entertainment, but tax revenues are projected to be down in the neighborhood of $2.8 billion over the next five years under the new rates.
For all taxpayers, income tax will drop from a progressive 6, 7, and 7.75, percent to a flat 5.8 percent in 2014 and 5.75 in 2015. That will mean, without computing deductions, the median North Carolina household ($46,450 income) will save about $430 in 2014 with the rate change. Of course, for most much of that will come through slightly higher paychecks as less is withheld.
Lawmakers promoted the law as saving all in the state money, though they also said they hoped the rates combined with new lower corporate rates would lure lure job creators. Residents making $100,000 – a bit less than 15 percent of households, will save $1,272. For each additional $100,000 earned, the cut shaves $1,950 off the tax bill.
Department of Revenue spokesman Trevor Johnson also noted that the standard deduction will more than double, possibly resulting in fewer people filing itemized deductions.
On the federal level, Merritt said the Affordable Care Act would have the biggest impact on the individual wage-earner, though the effects will vary by individual. Regarding the ACA, some of the wealthy granted relief by changes to state law will pay part of that back if they make over $250,000 per year because capital gains will be taxed at a slightly higher rate.
Meanwhile, businesses in particular have a lot to consider when it comes to the federal law.
“The health care act has just been all-consuming. I deal with a lot of small businesses,” Pandiscia said. “No one I’ve talked with the past year hasn’t raised concern over health care.”
He said the most concerned clients have been in the retail and restaurant business.The low-wage, high-turnover industries present unique challenges regarding the law as they decide whether to comply by offering insurance or pay a penalty. He said some businesses worry that if they pay the penalty – which would be cheaper – competitors might do the opposite to become more competitive in the labor market and possibly poach employees.
He said delays of enforcement have provided various businesses something of a reprieve – along with uncertainty that makes giving sound advice difficult.
Whether a tax increase involves axing a small business exemption only two years old that had wiped out state income tax on the first $50,000, or a capital gains tax that taxes income beyond $250,000 slightly higher but still lower than income, Merritt said there’s bound to be griping. Even removing loopholes to promote fairness ends up hurting someone’s bottom line.
“You’re offsetting that (rate increase) with (closing) a lot of what you could term loopholes, but if someone’s been used to receiving that tax break there’s going to be some screaming and squawking,” Merritt said.
Knightdale CPA Ronald Hines said that while tax law has always changed -- in theory helping drive customers to people like him – recent complications have become more frequent and difficult.
“Everything is much more complicated than it used to be, and it continues to get more complicated each year,” the 28-year-veteran CPA Hines said. “I feel for small business people these days.”
Hines also noted the elimination of the two-year-old small business deduction that could, in 2014, cost small business owners $3,500 to the state of North Carolina compared to what they could have paid in 2012 and 2013.
Local news for Garner provides a bit more optimism than state and federal issues with the state end of the small business exemption and the federal ACA. Asked about whether the expansion of White Oak Crossing and potential for an occupant at ConAgra, Pandiscia didn’t hedge.
“Absolutely. This is an exciting time for business growth in this area,” he said.
He doesn’t worry much about businesses being crowded out by the new players; he takes more of a rising tide raises all boats perspective with increased commercial and residential development.
“There’s always risk that you may have to adapt and change to better provide to the demographic,” he said. “(But) all of the peripheral businesses in the area, all the businesses that are the backbone of Garner, they stand to benefit.”
Jahner: 919-829-4822; Twitter: @garnercleveland