The two words on everyone’s mind are the same: the “fiscal cliff”.

Business owners nationwide are rightly concerned how the fiscal cliff will affect their companies, and whether Congress can pass an agreement at all — let alone one that helps the economy recover.

The scheduled tax rate increases, coupled with the spending decreases due to the budget sequestration that would go into effect Dec. 31, meet an economic climate in which unemployment exceeds 8 percent, the national debt exceeds $16.3 trillion and millions of people are effectively being supported by government subsidies, in the form of unemployment compensation, food stamps and other welfare programs.

The expected net result is that the GDP growth will decrease dramatically, likely resulting in a recession. It is quite possible that “going over the cliff” will cause dramatic results that will impact businesses immediately.

First, ordinary, dividend, capital gains and self-employment tax rates will increase at the same time that business-friendly deductions and credits are phased out or reduced. The reduction of Section 179 expensing limits and the elimination of bonus depreciation act as a disincentive to make new capital expenditures. Businesses owners will be forced to make spending decisions and estimate cash flow needs based on a projected income tax burden 25 percent to 50 percent greater than in prior years — limiting purchasing, hiring, inventory build-up and new investment.

Second, the budget sequestration will cause a dramatic decrease in government spending, particularly impacting construction, defense, education and any business that contracts with any business in these industries. Layoffs are expected. These types of losses hurt every business that depends on consumer purchasing, will create losses for financing companies, may impact housing and will further increase the cost to subsidize the unemployed and underemployed.

Third, the Patient Protection and Affordable Care Act will go into effect and the impact of the law on businesses, particularly small and medium business, is just not known at this point. Since many businesses expect that their costs will rise, particularly when many of the Obamacare provisions go into effect in 2014, businesses will be more hesitant to spend money.

So, what do we want to see in a bill that is passed into law?

• Predictability. Businesses and business owners are smart, adaptive and able to respond to difficult circumstances. However, short-term fixes do not allow businesses to plan for the long term.
• Growth-driven deficit reduction. Rules must be passed that incentivize business owners to invest in their businesses, hire more workers and not fear that rule changes will cause them to regret decisions they make today.
• Smart business incentives. If one were to review all of the business incentive and grant programs, and the tax credits and deductions available, it is clear that Congress has intentionally or unintentionally helped to select the winners and losers.

By identifying broad-based reasonable incentives and measures to limit onerous regulation, focusing particularly on small and medium size businesses, those companies that are most impacted will be able to invest and grow more quickly, with some of them growing to employ hundreds or even thousands of American workers.

David Rosen, CPA and tax attorney for Rosen, Sapperstein & Friedlander in Owings Mills, can be reached at drosen@rsandf.com.