Small business owners less likely to reinvest in companies as fiscal crisis nears

As President Obama and congressional Republicans wrangle over the terms of a deal to avert the so-called fiscal cliff, the likelihood of small business owners making significant investments in their companies over the next 12 months has plummeted, a national survey finds.

The latest Wells Fargo-Gallup Small Business Index, released today, finds small business owners' net capital spending intentions fell to -14 in November, the lowest such rating in more than two years and down from a level of -1 in July. It suggests business owners’ forecasts about the state of the economy and the tax climate next year are dour enough to prevent them from spending on things like computers, machinery and other long-term investments.

At Tart Lumber in Sterling, Va., a family-owned firm that has been selling construction materials and hardware to contractors, architects and homeowners for more than six decades, company executives echoed the sentiments seen in the national survey.

Tart president Carl Fritsche told Fox News he wants to replace seven-year-old computer servers but will not do so in the near future because of the uncertainty surrounding the fiscal negotiations.

“I’m going to get by with what I can until I know what Congress is going to do,” he said. “If the fiscal cliff happens, we’re going to go into a recession. People are going to put off wanting to buy their kitchens, or buying a new deck, or improve their home. I know it's going to impact my business. So I have to hold off on those business decisions.”

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At Wilkening Rental Properties, 35 miles away in Alexandria, Va., the fears at Tart are made real. Company founder Clifford Wilkening, who purchased his first rental units back in 1976, lamented that he will not be able to spruce up his properties as he expected he would.

“We're not going to be upgrading as many kitchens, replacing as many appliances, the bathroom equipment, air conditioning, stoves, right on down the line,” he said in an interview at his office. “What we're going to do is probably change our philosophy a little bit, and now we're going to start maintaining these things and maintain them as long as possible.”

The term “fiscal cliff” refers to the combination of tax increases and spending cuts that are set to go into effect automatically at the beginning of the year, unless Congress and the White House can agree swiftly on a deal to stave them off.

Obama and Senate Democrats have insisted that the elements of such a deal include an increase in tax rates on the nation’s top 2 percent of income earners -- individuals earning at least $200,000 and couples earning at least $250,000. Income they earn up to that threshold would continue to be taxed at the lower rates under that plan.

House Republicans have sought to increase federal revenues without raising tax rates, preferring instead to reform the tax code – and potentially widen the revenue base – by eliminating a wide range of tax deductions.

If no deal is struck before year’s end, small business owners stand to be among those most adversely impacted, because most small firms are “flow-through” companies. That means their profits “flow through” to their owners’ tax returns, and are taxed at the owners’ individual rates. If the Bush-era tax rates are permitted to expire at year’s end, as current law provides, individual rates will rise – and business owners, to absorb the impact, will take corresponding measures.

“I’ll probably lay off one full-time person,” Wilkening said. “That hurts.”

He said that whether a deal is struck or not, he will have to perform a “juggling act” to account for additional costs associated with mastering all the subtleties of the tax code.

“We've got new laws. We've got changes. We've got regulations.  The instability all of this (means) I’ve got to put out extra money now for lawyers, legal and accountants,  just to make sure I’m complying with these changes. What the heck? Big business? They've got full-time accountants, full-time lawyers on their staff.  That's all part of their overhead administration. But for us that's extra expense right off the top.

“Is a business going to survive this? It’s going to be very questionable whether we continue or if we close it down.”

Fox News’ Nicole Collins contributed to this report.