Policy Update: President Obama Focuses on Small Businesses to Spur Job Creation

Policy Update: President Obama Focuses on Small Businesses to Spur Job Creation 

President Obama has made clear that small businesses are central to the success of his top priority for 2010: creating jobs for America.  In the past few weeks he has announced several policies that, if passed, would allow small businesses to create jobs and generate economic growth.  Here is an update on these policies that are most relevant to the Capital Access Program’s business network.

Small Business Jobs and Wages Tax Cut

On Friday, January 29, President Obama announced details of his Small Business Jobs and Wages Tax Cut, one of his new proposals to create American jobs by lowering the costs of hiring workers.  If passed by Congress, this proposal will give small business – the traditional engine of job creation in the United States – a tax cut for new hiring.  It will also provide tax incentives for those businesses that expand wages for their employees.  Key provisions of the President’s proposal include:

• Businesses will receive a $5,000 tax credit for every net new employee that they employ in 2010.  The total amount of the credit for any one firm will be capped at $500,000, to ensure that the majority of the benefit is targeted at small businesses.  Start-ups will be eligible for half of the tax credit.
• Small businesses that increase wages or hours for their existing employees will be reimbursed for the Social Security payroll taxes they pay on real increases in their payrolls.  This bonus would not apply to wage increases above the current taxable maximum of $106,800.
• Firms will be able to claim the credit on a quarterly basis.  This will get money out to businesses quickly, and provide an early incentive to hire and increase payrolls.
• Nonprofit groups will be eligible for full credit.  Even though they are exempt from income tax, nonprofits would qualify because the credits will be applied to federal payroll taxes that these employers pay on behalf of their employees.

If Congress enacts the plan, more than one million small businesses would stand to benefit, at an estimated cost of $33 billion. The funds would come from the Troubled Asset Relief Program (TARP), which was passed in 2008 to bail out banks and other financial institutions, but still has billions of dollars left over.

State of the Union

In his State of the Union speech, President Obama also announced that he’s “proposing that [the federal government] 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.”  While specifics for this plan have yet to be formally announced, the hope is that this type of funding will compel smaller, local banks to lend the financial capital desperately needed by so many small business owners.  If lenders’ criteria were concurrently relaxed to make this capital accessible, small business owners may be better positioned to take advantage of this funding, as well as the aforementioned tax credit.

2011 Budget

Finally, the President’s proposed Fiscal Year 2011 Budget, released on February 1st, seeks to help entrepreneurs and small businesses build new enterprises that lead to new jobs and economic growth.  As many of the readers of this publication have likely experienced, one of the lingering difficulties of the recession is that it is difficult to access the capital needed to operate, grow, and create new jobs.  That is why the federal budget proposed by President Obama includes the following:

•  $165 million in subsidy costs to support $17.5 billion in Small Business Administration 7(a) loan guarantees that will help small businesses operate and expand.
• An increase in the maximum 7(a) loan size from $2 million to $5 million.  This is SBA’s primary and most flexible loan program, with financing guaranteed for a variety of general business purposes. It is designed for start-up and existing small businesses, and is delivered through commercial lending institutions.
• Incentives for additional investment.  As another aspect of his jobs plan, the President is proposing an additional year of allowing companies (large and small) to immediately deduct 50 percent of their qualifying investments, a step that will lower the cost of making investments today, encouraging job creation today and innovation for tomorrow.
• Enhanced small business expensing.  The Recovery Act allows small businesses to immediately write off up to $250,000 of qualified investment in 2008 and 2009, providing an immediate tax incentive to invest in plants and equipment and create jobs.  The President is proposing a one-year extension of this provision, which is estimated to cut small business taxes by over $1 billion in 2009 and 2010.
• Elimination of small business capital gains.  The Recovery Act encourages investment in small businesses by excluding from taxation 75% of the capital gains for investors in small businesses who hold their investments for five years. This provision will save small business owners nearly $1 billion over 10 years. The President’s Budget proposes to completely eliminate the capital gains tax on small business stock.