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Thursday, December 5, 2013

Fiscal Cliff and the Job Creators


As a leader of Armanino’s Middle Market niche, my intent was to write about what I thought the impact of the legislation would have on Middle Market companies in Southern California.

Rather than me prognosticating, I decided to go directly to some of the C-level executives of our Middle Market clients. After all, who would be better to ask about how they felt The Act would impact the economy than the “job creators” themselves?

My approach was to develop a 10 question survey covering areas like business planning, economic outlook for 2013, satisfaction/dissatisfaction with The Act, and capital additions planning. I sent the survey to operating and financial executives and found that many were eager to respond and express their thoughts. In some cases, it gave them the opportunity to vent. This is what those C-level executives had to say.

Business Planning
As far as business planning for 2013, a number of executives said they were not making any major changes as a result of The Act. This is primarily because they believed that the legislation would not result in the “Grand Bargain.”

Another executive explained that their business planning included putting the brakes on growth to stay below the 50 full-time employee threshold that is now included in The Act. Another client operates worldwide and is gearing their growth plans to non-U.S. business because they believe the economic climate to be more business friendly to them.

Economic Outlook for 2013
When asked about the economic outlook for 2013 after the passing of The Act, there were a variety of views. A number of respondents felt good about the prospects for 2013, but they said that was in spite of the legislation. Rather, their cautious optimism was predicated on the economic sector where their business resides.

On the pessimistic side, those whose success is more dependent upon the overall economy feel that The Act did nothing to energize the economy and that a no growth year is what they expect for 2013. Despite the varying range of opinions, the one feeling that permeated the responses was uncertainty. The respondents say they have felt uncertain the past several years and the legislation did nothing to change that thought.

Capital Additions Planning
There were two business friendly provisions in The Act. They include the extension of bonus depreciation for certain capital expenditures and the extension of tax credits for research and development (R&D). To benefit from these provisions, taxpayers usually need to increase expenditures in each of these areas.

Taking advantage of the depreciation benefit means increased capital expenditures. For R&D, the increased expenditures are usually reflected in salaries and wages. Asked if they planned to increase spending in these areas to take advantage of the extension of these tax breaks, all surveyed executives said these provisions had no bearing on those budget decisions. In one case, however, the respondent indicated that had these provisions not been extended they most likely would have reduced spending in these areas.

Satisfaction/Dissatisfaction with The Act
When asked about the looming debt crisis, no one had any positive things to say. Certain respondents said they didn’t see how The Act would affect them. These included businesses that are in unique industry sectors that have not been directly impacted by the national and worldwide economy.

Those that are impacted by the broader economy felt the debt ceiling crisis will have a negative impact on the economy. They expressed their concern that the crisis will have a negative effect on an already shaky economy, which lessens business confidence and lessens hiring as a result. Lower employment could also mean less consumer confidence and lower consumer spending. Others feel the crisis could lead to higher inflation resulting in higher prices ultimately hurting the consumer.

When speaking of individual provisions in The Act, there were more negative comments than positive. Certain respondents liked the extension of the depreciation and R&D provisions, and the easing up of the estate tax exemption. On the other side, however, the resondents felt that the increase in tax rates on higher incomes could change business behavior to avoid higher rates by diverting resources to lower tax jurisdictions. Also, there was a strong feeling that the uncertainty of the financial impact of “Obamacare,” combined with the tax rate increases, would lead to job losses (and reduced consumer spending).

Finally, when asked how they felt about the legislation, here are some one word answers that were provided: disappointed, uncertainty, dissatisfaction, pessimism. Unfortunately, not a single positive word.

There you have it. The feelings made known by the business leaders and job creators of Southern California. I wish to thank all of the participants for taking time out of their busy schedule to share with the business community how they’re feeling about things and in particular, their impression of The Act. I appreciate how open, frank, and respectful they have been in sharing their opinions.

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