Anita Campbell suggests that small business owners be pragmatic about the new law and look to what’s good in it. I would take this a step further and say that the Small Business Jobs Act is a misnomer and not the right legislation to accomplish any of the stated goals. According to the Senate Finance Committee, the Act:
- Gives small businesses $12 billion in tax cuts
- Helps small businesses create 500,000 new jobs
- Incentivizes and increases small business lending
- Helps small business owners access private capital to finance an expansion and hire new workers
- Rewards entrepreneurs for investing in new small businesses
- Helps Main Street businesses compete with large corporations
Let’s examine the provisions within the Act to see whether they will help to accomplish these goals.
$12 billion in tax cuts
The dollar loss in revenue from the tax cuts may add up to $12 billion, but for most small businesses, there are very few helpful breaks. (I can’t use a single new break.)
- The increase in the write-off for start-ups does nothing for existing businesses.
- The increase in the first-year expensing limit (“Section 179 deduction”) and 50 percent bonus depreciation are generous tax breaks, but only for companies investing in a large amount of capital equipment. Service businesses (which mean many small businesses) make little or no capital investments each year; without the Act they would already have had the opportunity to deduct up to $250,000 in equipment purchases.
- The longer carry-back period for the unused general business credit of eligible small businesses again only benefits companies that are in a position to take advantage of sizable credits. “Small business” for this purpose isn’t just mom and pop on Main Street; it means companies with $50 million in average annual gross receipts in the three prior years—large companies from a small business owner’s perspective.
- The reduction in net earnings from self-employment tax for a self-employed person’s health insurance premiums is a very good tax break, saving such individual about $1,500 in taxes if annual his or her premiums are around $10,000. However, this break only applies for 2010. The only provision in the Act that will affect a large number of small businesses is the new 1099 reporting of rents to landlords. This provision helps the government track the rentals received by landlords; it does nothing to help small businesses. In fact, it is a detriment by adding more paperwork for business tenants.
How? Small firms can only create jobs when business is growing and there is customer demand. With continued high unemployment and uncertainty about the economy and future taxes, customers just aren’t spending. The likelihood of any jobs being created as a direct result of incentives in the Act is slim. The National Federation of Independent Business (NFIB) has concluded as much.
Increase small business lending
The Act contains a number of ways in which there will be more capital available to small business borrowers. The Act, however, does not address the fact that businesses usually borrow when they are growing, which is something that isn’t widespread among small companies at the moment.
The Act does not change the lending standards, which have been tightened substantially for borrowers since the recession began. Since small business owners must, in most cases, give their personal guarantee for any business loan, their FICO score is paramount to getting a loan or at least a favorable interest rate; the FICO score needed for borrowing has not been lowered in any way by the Act. Banks could reduce their lending standards, but this remains to be seen.
Rewards entrepreneurs for investing in small business
Investors have a limited window of opportunity to buy qualified small business stock in order to take advantage of the 100 percent exclusion for gain on the sale of such stock, a tax break created by the Act. The purchase must be after the date of enactment and before January 1, 2011. The exclusion, however, only applies to stock in an eligible C corporation; most small businesses today are organized as S corporations or limited liability companies, so the tax break does nothing to incentivize investments in the vast majorities of small businesses.
Helps small business compete
For many years now, the federal government has had contracting standards that require 23 percent of its contracts to be awarded to small businesses. While some small businesses have enjoyed contract awards, much of the slice of the contract pie for small business has gone to larger companies (often through faulty labels on their sizes, oversights, and other government errors). The Act is supposed to help ensure that small businesses receive their fair share by removing red tape and periodically reviewing the size of contractors to ensure that only small businesses get small business contracts. Let’s see whether the changes in the Act will result in any meaningful change that lets small business compete with large companies for government contracts.
Each and every provision in the Act, on its own, appears to be favorable to small business. When examined a little further, the provisions offer more in the nature of public relations than actual small business help.
Congress would better serve small business by listening to their problems. The SBA’s Office of Advocacy recently released a report showing the impact of regulatory costs on small businesses. On average, small businesses pay 36 percent more than large firms to comply with regulations when figured on a per employee basis. Compliance with environmental regulation costs 364 percent more; tax compliance costs 206 percent more. What small business needs, in my opinion, is certainty about tax rules for at least five years so they can plan, no additional taxes, and a reduction in the regulatory burden. Let’s see what the next Congress can do about these things.
Submit your question for Karen Mills, Administrator of the Small Business Administration, at openforum.com/whitehouse.