Posted by: John Tozzi on January 28, Newsweek Magazine
A short but prominent section of President Obama’s State of the Union focused on helping small businesses to create jobs. Here’s a look at what he said and what it means. From the speech:
“Now, the true engine of job creation in this country will always be America’s businesses. But government can create the conditions necessary for businesses to expand and hire more workers”.”We should start where most new jobs do –- in small businesses, companies that begin when — companies that begin when an entrepreneur — when an entrepreneur takes a chance on a dream, or a worker decides it’s time she became her own boss. Through sheer grit and determination, these companies have weathered the recession and they’re ready to grow. But when you talk to small businessowners in places like Allentown, Pennsylvania, or Elyria, Ohio, you find out that even though banks on Wall Street are lending again, they’re mostly lending to bigger companies. Financing remains difficult for small businessowners across the country, even those that are making a profit”.
Obama acknowledges that even though the credit crunch has eased for large companies that can borrow in the capital markets, bank lending to small businesses is still hampered. This picture became clear last fall, and the White House has hosted two summits with bankers where Obama urged them to increase lending. Banks remain under pressure from regulators to reduce risk on their books.
“So tonight, I’m proposing that we take $30 billion of the money Wall Street banks have repaid and use it to help community banks give small businesses the credit they need to stay afloat”.
The White House actually announced this proposal at a meeting with community bankers in December. Details remain sketchy, but the WSJ reports that the plan may let small banks borrow from leftover TARP funds at low rates if they increase their small business lending, without the same restrictions on compensation that applied to earlier TARP recipients. This change likely needs approval from Congress.
[Late update: More on this here.]
“I’m also proposing a new small business tax credit -– one that will go to over one million small businesses who hire new workers or raise wages”.
Congress is kicking around some proposals for a hiring tax credit. One plan by Sen. Bob Casey (D-Pa.) would give small businesses a one-year tax credit that hire new workers and increase their payroll. Companies with under 100 employees could write off 20% of the amount their payroll increased from the previous year. Larger firms could write off 15%. More from Dow Jones here. Obama himself has proposed flat $3,000 tax credits for new hires in the past.
While we’re at it, let’s also eliminate all capital gains taxes on small business investment…
The administration talked about this late last year. Currently, 75% of capital gains from selling stock in small private companies is exempt, but that expires for investments made after 2010. Obama’s plan would exempt 100% of those gains.
It’s an incentive designed to get more money into small businesses by making the investments more attractive, especially since tax rates on other capital gains — like the sale of stock in large companies — are expected to rise from 15% to 20%, says Lewis Taub, tax director at business consultant RSM McGladrey in New York. Angel investors or business owners who want to put more of their personal wealth into their companies would benefit when they sell their equity stakes. Eliminating capital gains on small business stock, combined with raising the rates on other types of capital gains, makes small businesses a more attractive asset class to invest in, Taub says. (To qualify, the company “may not have gross assets exceeding $50 million [including the proceeds of the newly issued stock] and may not be an S corporation,” Taub says.)
…and provide a tax incentive for all large businesses and all small businesses to invest in new plants and equipment.
Also previously announced, this refers to extending immediate deductions for capital investments that would normally have to be depreciated over several years. The incentives take two forms: Section 179, which allows total deduction of a capital expenditure up to a certain dollar amount, and bonus depreciation, which allows for an immediate deduction of 50% of the expenditure with no limit.
These provisions were set to expire at the of 2009. Taub says extending them would further encourage businesses to invest in expansion, which is tied to jobs. “If I invest in property, I’m expanding my plant, I’m expanding my operations, I have to hire people,” he says.
Another interesting bit: Obama set a goal to double US exports in the next five years, a priority the US Chamber of Commerce has pushed for.
“To help meet this goal, we’re launching a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security”.
More details to come.
The big wildcard for small business owners remains health care. Obama said he was still committed to passing reform. But since Democrats lost the crucial 60th Senate vote, the future of the biggest domestic policy priority of the president’s first year remains in doubt.