[Update Sep 2010] Following on from President Obama’s plans to help small business, Congress and the President have approved the Small Business Jobs Bill ( H.R. 5297) to cut taxes, provide more SBA funding and ease credit for small businesses (details below). The legislation would create a $30 billion lending program and provide small businesses with $12 billion in tax breaks, including more generous write-offs for equipment purchases.
“Reinvigorating our economy in the short run and rebuilding it over the long term is not a one-step process,” Obama said today. “But this is a critically important one and I am grateful to those senators on the Republican side of the aisle willing to take this vote on behalf of America’s small- business owners.”
The lending program is designed to help small business owners who have seen the value of real estate and other types of loan collateral sapped by the recession. The $30 billion lending program would be reserved for banks with less than $10 billion in assets. The bill cut fees on loans offered through the government’s Small Business Administration (SBA) and raises the limits on SBA loans from $2 million to $5 million.
The $30 billion lending program would work by creating a fund that directly invests in “smaller” local and community banks (<$10 billion in assets) through purchasing preferred stock, which returns between 1% to 7% in dividends to the government based on how effective their small business lending programs are. For example, a bank that boosts their small business lending by 10% over last year’s levels would only have to pay the government a 1% dividend. Whereas banks that do not increase their small business lending, could face a dividend repayment of up to 7%. The preferred stock return is also one way the government is able to ensure banks lend money (a major issue with the TARP bank bailouts) and also to pay for this lending program without significantly adding to the deficit.
According to the finance committee fact sheet the final provisions on this bill include:
Access to Capital
- 100% exclusion from capital gains taxes on small business investments. By allowing a 100% deduction of capital investments, businesses of all sizes will be allowed to keep more money now and would give large corporations, many of which are sitting on cash due to uncertainty about the economy, an incentive to spend and invest; thereby creating new jobs
- $1.5 billion in grants to support $15 billion in new small business lending through state programs.
– Allows carry back of general business tax credits to offset tax burdens from tje previous five years.
- Small businesses will also be able to count the general business credits against the Alternative Minimum Tax (AMT), freeing up capital for expansion and job growth
- Creates a targeted $30 billion Small Business Lending Fund to provide small community banks with capital to increase small business lending. This includes increased SBA loan limits and lower access costs
Increases Small Businesses’ Ability to Make Investments and Cuts Taxes
– Permitting up to $500,000 in capital investments that businesses can expense
– Extends Bonus Depreciation, allowing small business taxpayers to immediately write off 50 percent of the cost of new equipment
– Increases to $10,000 the tax deduction for start-up expenditures – doubling the current levels.
– Improves tax fairness by preventing small businesses from incurring large tax penalties aimed at large corporations and wealthy individuals investing in tax shelters
– Allows self-employed individuals to deduct health insurance costs for purposes of paying the self-employment tax
Small Business Export and Competition
– The bill creates new tools to help small businesses export goods, which will leverage more than $1 billion in exports. It also establishes a new State Export Promotion Grant Program (STEP), which would increase the number of small businesses that export goods to other countries
– This bill clarifies that no single contracting program receives priority over another program when competing for federal contracts
[Update September 2010] In an effort to provide a sustained job creation program, President Obama called for Congress to approve major upgrades to the nation’s roads, rail lines and runways — part of a six-year plan that would cost tens of billions of dollars and create a government-run bank to finance innovative transportation projects. He also wants to allow businesses to deduct from their taxes through 2011 the full value of qualified capital investments, from computers to utility generators, to boost demand for goods and create jobs.
“We used to have the best infrastructure in the world and we can have it again. We want to reform the way we fund and maintain our infrastructure to focus less on wasteful earmarks and outdated formulas, and we want competition and innovation that gives us the best bang for the buck,” Obama said, adding “this is a plan that will be fully paid for, it will not add to the deficit over time – we’re going to work with Congress to see to that.”
Small Business Capital Tax Deduction – 100% Expensing or “Bonus Deprecation”
By allowing a 100% deduction of capital investments, businesses of all sizes will be allowed to keep more money now and would give large corporations, many of which are sitting on cash due to uncertainty about the economy, an incentive to spend and invest; thereby creating new jobs. This measure, an expansion of a previous tax incentive designed to encourage businesses to invest in equipment, would cost an estimated $200 billion in revenues though the ultimate net loss would be $30 billion over 10 years, according to administration officials, since businesses would eventually deduct the depreciated value of the equipment in any case. A draft paper on the proposal permitting businesses to write off the full costs of capital spending in 2010 and 2011 said it “would be the largest temporary investment incentive in American history.”
The provision also seeks to expand and make permanent a tax credit for corporations’ research and development expenses; for three decades the credit has been enacted temporarily given its revenue cost and then always extended, but with frequent lapses that frustrate businesses.
Transportation Projects Stimulus Spending
The transportation or infrastructure stimulus calls for a quick infusion of $50 billion in government spending that White House officials said could spur job growth as early as next year — if Congress approves. The plan includes rebuilding 150,000 miles of roads; building and maintaining 4,000 miles of rail lines and 150 miles of airport runways, and installing a new air navigation system to reduce travel times and delays. Central to the plan is the president’s call for an “infrastructure bank,” which would be run by the government but would pool tax dollars with private investment to focus on paying for national and regional infrastructure projects.
[New 2010-2011 Provisions] To address high unemployment and tight credit markets, President Obama has put in place more stimulus funded tax breaks for small business in his latest budget. The President is pushing Congress to use $30 billion that had been set aside from the TARP program to bail out Wall Street to start a new program that provides loans and tax credits to small businesses, which the White House calls the engine for job growth. This would include the following new 2010 provisions:
** [Update]See more business tax breaks and incentives in the 2010 HIRE Act – Health Care Benefits, Payroll Tax Incentive and Business Credit For Employers Hiring and Retaining Unemployed Workers
– A $5,000 hiring tax credit for each net new employee they hire this year. The $5,000 per-worker tax credit would be available to businesses of any size, and would be retroactive to the start of the year. Startups launched in 2010 would be eligible for half of the tax credit. To prevent fraud and misuse of the tax credits, the IRS (who will administer the credits) would require companies would have to show net increases in their staffing and payroll to qualify. Businesses that cut 20 workers and hire five wouldn’t be eligible, nor would those that lay off a $50,000 worker and hire two $20,000 staffers.
– A reimbursement of the Social Security taxes businesses pay on increases in their payrolls this year. Firms could earn the credit by raising wages or increasing the hours of their current workers, as well as by hiring new employees. The tax credit would be adjusted for inflation, and would not apply to wage increases above the current taxable maximum of $106,800.
– While any business would be eligible for the tax breaks, the refund would be capped at a total of $500,000 per firm, a move the White House hopes will steer the biggest benefits to the smallest companies. Firms eager for cash could claim the credits on a quarterly basis, sparing them the wait before they file their annual taxes.
– Eliminate Capital Gains Tax on Investments in Small Businesses. To create an incentive for long-term investments in the small business sector, the Budget eliminates the capital gains taxes on long-term investments in many small businesses. The Recovery Act (2009 stimulus) temporarily increased the exclusion to 75 percent. The Budget proposes to raise this exclusion to 100 percent, meaning that no income tax whatsoever would be paid on these investments in our Nation’s small businesses.
–Provide funds to support $17.5 billion in SBA 7(a) loan guarantees that will help small businesses operate and expand. The Budget will also support $7.5 billion in guaranteed lending for commercial real estate development and heavy machinery purchases; $3 billion in Small Business Investment Company debentures to support new businesses and new jobs through early-stage and mezzanine small business financing; and $25 million in direct microloans, for intermediaries to provide small loans to emerging entrepreneurs and other promising, but “un-bankable,” borrowers. In addition, the Budget proposes to significantly increase the maximum loan sizes on SBA loans, including an increase from $2 million to $5 million for 7(a) business loans, to further improve small business access to credit.
The administration expects 1 million businesses to benefit from these new provisions.
[2009 Enacted Tax Breaks] There is little doubt that small businesses are the heart of the American economy. They have created roughly 70 percent of new jobs in the last decade, and are the key to reversing current unemployment trends and getting the nation out of recession. With this in mind, President Obama revealed his $15 billion dollar plan to help small businesses all over the country. Here are the key elements and how your new or existing business can benefit (pay particular attention to the tax breaks):
- The 21 largest banks receiving government money must report monthly (while others receiving taxpayer money need to report quarterly) on how much lending they do to small businesses. A government website will be setup to make this information public, so check how your bank is doing. If they are proving difficult in providing loans, switch to one that is more accommodating. The data will give you the information you need to shop around most effectively.
- Immediately reduce small-business lending fees and to increase government guarantees on some SBA loans. The Small Business Administration (SBA) currently guarantees payment on 85 percent of a loan up to $150,000, and as much as 75 percent on loans of more than $150,000. The administration is raising the guarantee to 90 percent, reducing lender risk, and waiving fees of as much as $75,000 that are paid by borrowers. This will be funded via $730 million from the recently passed stimulus plan.
- The government will take aggressive steps to boost bank liquidity with up to $15 billion aimed at unfreezing the secondary credit market – this is where most commercial and small business loans are made. Where needed the government will step in to buy small business loans to help unlock the frozen credit market.
- Small business owners will be able to borrow as much as $2 million with enhanced government assurances. Companies in need of financing for big economic development projects will have a guarantee on as much as $4 million in loans, under the plan.
- The IRS has also issued a series of new rules for temporary but significant tax breaks, meaning that small businesses:
That earn up to an average of $15 million (qualifying limit) in gross receipts annually over a three-year period will be allowed to claim losses for the past five years in the current tax year. This limit prevents larger business’ from claiming this tax exemption. It also means many firms should get refunds now, rather than have to wait to deduct 2008 losses from future profits after the economy recovers. But firms must decide whether to use the five-year carry back provision and which year it applies to by April 17.May write off up to $250,000 in investments this year.
Will see 75 percent of capital gains excluded for those who invest in small businesses.
Can reduce estimated tax payments to 90 percent of the previous year’s filing.
Are allowed to take larger depreciation deductions within the first year of property purchases.
Overall, these measures should provide a boost but $15 billion seems a small amount, especially when compared to the $700 billion stimulus and TARP plans. However, as a small business owner the key benefits will come from the tax changes. Make sure you discuss these with your accountant at your next meeting and plan to take advantage of the new provisions.