Your Taxes: Unintended tax consequences of 60, 61, 101
October 26, 2010
There’s no question Amendments 60 and 61 and Proposition 101 have been hot topics this election season. Because I have already spoken out publically against these issues, I am not claiming to be impartial, but I do want to share a few of the tax consequences to small businesses I see going into the effect if any of these three pass in November.The first unintended consequence is the effect on unemployment insurance rates. Under Amendment 61, our state is no longer allowed to borrow funds, and therefore Colorado may not be able to keep up its contributions to the federal unemployment fund. Currently, every employer must pay two types of unemployment insurance for every employee they hire. The first is a rate set by Colorado, and it ranges from 1-5 percent (although it could go higher if your company has a history of paying out claims). Each company has its own rate, and they must pay this rate based on the first $10,000 of wages for each employee. The second type of unemployment insurance is at the federal level. Both employers and states pay into a federal fund, and as a result the federal government subsidizes unemployment payouts to employees. If our state can no longer afford to pay into the federal funds, employers in our state may have to begin making up the difference by paying higher rates.Along the same lines, if the state is unable to borrow money in accordance with Amendment 61, and if income taxes are cut by Proposition 101, many capital improvement projects may have to be funded by assessments. Currently, we each pay property taxes each year, and if the state doesn’t have enough funds for a project, they borrow what they need. Without the ability to borrow, capital projects such as road and bridge repairs may be paid for via assessments, similar to how condo owners pay HOA dues each year, and occasionally have to pitch in significant amounts for major repairs. The catch is that when you have a small business, you can deduct the property taxes you pay each year. But, if your business must pay an assessment, it may not take a deduction for that assessment in one year, it must instead spread the cost of the assessment over the life of the improvement. So, while the allure of lower taxes is certainly a reason to vote for 60, 61 and 101, even if you end up paying out the same amount of expenses over a 10-year period, the difference between deducting property taxes in the year they are incurred versus paying for a large assessment one year and taking the deduction over 10 years may cause financial hardship for a small business. Even though cash is expended, the small business won’t be able to take a deduction for the expense and will have to pay income tax on the amounts spent.As with any ballot issue, I encourage everyone to research the facts and make their own decision. While every election is important, the choices we all make this year will have more of an impact on our wallets than most elections I’ve seen. Michele Knight, owner of Knight Accounting & Technology, is a CPA and QuickBooks ProAdvisor based in Dillon. For more info and to contact her, visit http://www.cpamichele.com.
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