Obama Small Business Tax Cuts?

http://www.schoolforstartups.com/obama-small-business-tax-cuts/

Today, President Obama announced several new job promotion initiatives at a speech at the Brookings Institute.  There were three main categories of initiatives; small business tax cuts, investments in roads, bridge and infrastructure, and finally, investments in green energy.  I wanted to look at the small business tax cuts to see if they will really lead to entrepreneurs hiring more employees.

One of the reasons this is so important is that small businesses create the new jobs in America, meaning our economic success is dependent on entrepreneurs.  So far, the Obama administration and all the various job and stimulus programs have done nothing to help small business.  Will these new efforts make a difference?

No.  They are all window dressing, and ignore proven ways to actually improve the situation.

The first tax initiative is to reduce capital gains taxes for small business to zero for one year.  Capital gains taxes are paid on the profit realized on the sale on non-inventory assets.  If a business sells all the stuff that it normally does not sell, they pay no taxes on the profits.  Say a bread (inventory) company sells all its ovens (non-inventory), they will pay no taxes on the profits.  What has the company got left then?  NOTHING.  It is out of business. Capital gains taxes are not paid by small businesses.  INCOME taxes are.  This is sham.  If the Obama administration wanted to increase job hirings, cut a tax that small businesses really pay!  Republicans are always pushing for a capital gains tax cuts, but for investors, not for small businesses.  Its as if the Democrats took a phrase they think would make Republicans happy, but then used it in the wrong way.  This will create no jobs.

Second, Obama proposes making it easier to write off expenses and investment funds.  Both of these initiatives are extensions of existing efforts.  Efforts that already have been shown to be worthless.  These efforts have been in effect for a year and have shown no ability to create jobs.  Another sham.

Finally, they propose eliminating fees and eliminating guarantees for the SBA programs.  SBA loans take years to get.  They are available to businesses that could borrow from a bank if they wanted to.  The real entrepreneur that needs capital would NEVER get a SBA loan, and they would spend so much time trying to raise the money, that it is not worth it.  The Entrepreneur School has a very low opinion of the SBA and their loan programs.

Why then is Obama doing all this?  Because he has no idea how to really fix things.  Because he has never run a business and doesn’t understnad the words he is using.  I’d give anything to see a reporter ask him what capital gains are.  I bet he’d have no idea.

What should be done?  Easy.  Cutting taxes, or simply making the Bush cuts permanent, would help.  And most importantly, getting rid of the threat of the health care plan.  No business will hire anyone until the rules of the game are firmly established.  They don’t know how much an employee will cost, and they wont know until the silliness of health care reform goes away.

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Author: Jim Beach

21 Responses to 'Obama Small Business Tax Cuts?'

Jack
December 8, 2009, 2:49 pm

I could not agree more. He does not know what he is talking about. This is the second time he has made the idiotic claim about cutting “capital gains” taxes on small businesses. He did it during the campaign also and it’s alarming that no one in that bizarre administration has had time to correct and/or educate him on what taxes small businesses really pay. This is worse than Jimmy Carter.

December 8, 2009, 5:37 pm

Jim,

Great blog and an interesting extension to our conversations yesterday about the role of the government (public) verses the role of private institutions and individuals.

So in trying to think positively , I was thinking through a few areas where this tax cut would benefit a small business. After thinking through the entire equation though I believe, as you said, this is indeed a window dressing.

First, a quick caveat that I may have the tax info wrong, I called a few of my CPA friends but haven’t reached them yet. The cap gains reduction will help small businesses that focus on the purchase and sale of real estate. Now this assumes that there are capital gains realized in the purchase and sale of real estate. Real estate developers will form an LLC to purchase a piece of property, improve that property, and then sell that property for a profit or capital gain. I believe that the LLC is then taxed via a Cap Gains Tax. This will also help the small businesses that like to buy, fix-up, and sell homes.

Now, that being said, the reality is that activity in either of these areas is very, very low if not zero right now. OBVIOUSLY! The real estate crash last year bottomed out values of all real estate in all asset classes. So THERE WILL BE VERY LITTLE CAPITAL GAINS on real estate in 2009 and thus, you are ultimately correct in saying the value to small business in this area with this tax cut is close to nothing. I wonder what the ratio is to capital loss verses capital gain in the last year.

One may argue a few possibilities:
– There remains the possibly of a few good real estate purchases before the boom where current values are above the price purchased. I’m guessing there are not many of these. And even for the possible deals like this there is very little capital available for the actual purchase. Plus most of any real estate acquisition activity is being seen in the sale of bank owned assets.
– Another possibility for capital gains would be in the recent sale and profit of a property that was purchased right after the crash and thus at a low price. I would say that still there isn’t a significant source of deals where this has happened. Secondly, even though prices have stabilized and increased some they are still relatively flat from a year ago. Thus, no capital gains. Thirdly, the actual volume of these deals probably isn’t enough to support any kind of increase in jobs.

The last thing I can think of is there may be the possibility that if this tax reduction is for 2010 then there may more volume at better prices thus saving those who do these deals the capital gains tax. Even if this is the case it misses a very large portion of small businesses.

satish rao
December 8, 2009, 7:12 pm

Regarding your comments on the capital gains tax, you confuse the incidence and the burden of a tax. It is true that small businesses rarely pay a capital gains tax. But the burden of the disincentive of a capital gains tax is almost wholly on the entrepreneur, not the investor. The entrepreneur needs the investor’s capital.

Most small businesses are starving for capital, either for expansion or working capital. Investors can either lend money to small businesses in the form of equity purchases (typically), large established entities’ equity or debt, or government debt. Most small business equity is quite risky and takes a long time to pay off. Since the capital gains tax is not indexed to inflation, and since most investments fail, a 15% statutory rate is at times a 50%+ effective rate. If you put barriers between those that have excess capital and those starving for capital, it makes little difference who pays or doesn’t pay a particular tax. The investment will not occur, and the small business with a small tax bill will be no business after all.

Mark Capson
December 8, 2009, 7:27 pm

What a bunch of dimwits! Green Jobs vs. Manufacturing, Obama VS Bush? You people don’t see the big picture. The politicians on both sides are selling out the American middle class. We need more rules in effect to make lobbyist money/political contributions more transparent. We have them to blame for being in this mess now.
They should start by placing a Unemployment and Retraining tax Tarrif on any company who moves jobs overseas. Also no TARP or Fed grant money to companies that off shored jobs in the last 2 years.Because of the 15.4 million unemployed people since the first of the year. Also close ALL off shore tax loopholes were it is cheaper to off shore a job then it is to create one in this country. Small Business for job creation? If you’re talking about min wage part time work for Teens and college students that’s fine. But to raise a family in minimum wage and part-time work you would have to count of government food stamps to just eat. I bet 90% of those jobs got off shored to call centers for customer service for everything from credit cards, DSL/Cable, Digital TV, Cell phone , gas/electric utility to any customer service or computer help deck position. This is the state of America today. It is a national disgrace. It has completely destroyed the American middle class and ruin countless lives. It’s all about cheap labor and corporate greed. It’s about the corporate top getting dozen getting bonuses for “COST CUTTING” = Selling out the american worker and off shoring jobs, the rest who retain jobs here in the US dont see a dime of that. As what the US should have done with banks, investment firms and wall street. We need MORE REGULATION and more rules in effect to make lobbyist money/politital contribuations more transparent to keep the jobs from being offshored. Is a national disgrace.

December 8, 2009, 9:31 pm

Good post, Jim. I may have this wrong but I think Obama in his speech said the capital gains tax elimination would apply to stock, which would mean small PUBLIC companies, which we all know aren’t very small. The small business owners I asked said they don’t pay capital gains tax and therefore thought this proposal wouldn’t benefit them. They also didn’t see how it would encourage them to add jobs.

Todd
December 8, 2009, 10:02 pm

If you want to parse words, small businesses don’t pay income taxes. They don’t have an income. Small business owners do. And eliminating the capital gains tax would allow people to sell their business without paying a tax on it. This would free up capital and spur more investment. I think this is the true purpose.

If you bought a business 10 years ago for 100,000 and it is now worth 500,000, you would save over 120,000 in taxes if Obama got rid of this tax. This would allow that business owner to sell a successful business and move on investing his money else where.

Todd
December 8, 2009, 10:11 pm

Upon further investigation, the tax cut is very specific.

“Obama also proposed eliminating capital gains taxes on small business stock, if it is purchased in 2010 and held for at least five years, expanding a tax break enacted in the stimulus package.”

December 9, 2009, 4:53 am

I think it is right step to improve the current employment condition by reducing tax for small businesses.

December 9, 2009, 11:43 am

Are you saying that Obama’s work aren’t good enough up to now? He’s just masking the crisis?

December 10, 2009, 7:35 am

Obama is the crisis!

Greg
December 10, 2009, 2:48 pm

Below is exact excerpt from the Press Release. > my comments
I. THREE KEY AREAS FOR ACCELERATING JOB GROWTH
1. Helping Small Businesses Expand Investment, Hire Workers and Access Credit
• Tax cuts to support additional business investment next year – with a particular focus on struggling small businesses – with much of the cost recouped over time.

1.Zero capital gains for small businesses: To encourage investment by small businesses and improve their access to capital, the Administration is calling for a one-year elimination of the tax on capital gains from new investments in small business stock. The Recovery Act allowed a 75% exclusion from capital gains taxes on small business investments.

> The capital gains tax cut has nothing to do with ordinary income earnings as you suggested. It has to do with investment in the small business. While this is may be weakest component, it is only one small component of the entire press release. You have IGNORED all the more beneficial components. How convenient for you and your minions.

2.Extension of enhanced expensing provisions for small businesses: The Administration is also calling for the extension through 2010 of the Recovery Act provision that allows small businesses to immediately expense up to $250,000 of qualified investment.

> A clear tax benefit #1 that you have ignored.

3. Extension of Recovery Act bonus depreciation tax incentive: To give businesses an incentive to invest, the Administration is calling for extending the Recovery Act provision that accelerates the rate at which business can deduct the cost of capital expenditures. This provision will put more than $20 billion in the hands of businesses in 2010, while enabling Treasury to recoup much of the funding as business regain their strength.

> Clear tax benefit #2 that you have ignored.

4) A new tax cut for small businesses to encourage hiring in 2010. Although the economy is now growing again, many businesses remain reluctant to hire. In this economic environment, an employment tax cut for small businesses has the potential to accelerate the pace of hiring. The Administration believes it is important to provide a short-term tax incentive to encourage small business hiring and support employment, and will work with Congress to design a provision that accomplishes these goals.

Eliminating fees and increasing guarantees for small businesses that borrow through major SBA programs in 2010. The President called for the elimination of fees and an increase in guarantees for loans through the Small Business Administration, a measure that extends provisions in the Recovery Act through the end of 2010. In addition, the President called for continued Treasury efforts to use the TARP to support small business lending.

> Benefit #3 that you have ignored.

Greg
December 10, 2009, 3:07 pm

I could easily call YOU a SHAM, but I have better judgment than that. You are just highly biased and subjective in your reasoning. Just like FOX & RUSH, et al trained you to be. You have focused on one of MANY components in the Press Release and mischaracterized it. I have copied the four components for small business below. You mention only the weakest one to facilitate your argument……
I. THREE KEY AREAS FOR ACCELERATING JOB GROWTH
1. Helping Small Businesses Expand Investment, Hire Workers and Access Credit
• Tax cuts to support additional business investment next year – with a particular focus on struggling small businesses – with much of the cost recouped over time.

1. Zero capital gains for small businesses: To encourage investment by small businesses and improve their access to capital, the Administration is calling for a one-year elimination of the tax on capital gains from new investments in small business stock. The Recovery Act allowed a 75% exclusion from capital gains taxes on small business investments.
2.
Extension of enhanced expensing provisions for small businesses: The Administration is also calling for the extension through 2010 of the Recovery Act provision that allows small businesses to immediately expense up to $250,000 of qualified investment.

3.
4. Extension of Recovery Act bonus depreciation tax incentive: To give businesses an incentive to invest, the Administration is calling for extending the Recovery Act provision that accelerates the rate at which business can deduct the cost of capital expenditures. This provision will put more than $20 billion in the hands of businesses in 2010, while enabling Treasury to recoup much of the funding as business regain their strength.
5.
• A new tax cut for small businesses to encourage hiring in 2010. Although the economy is now growing again, many businesses remain reluctant to hire. In this economic environment, an employment tax cut for small businesses has the potential to accelerate the pace of hiring. The Administration believes it is important to provide a short-term tax incentive to encourage small business hiring and support employment, and will work with Congress to design a provision that accomplishes these goals.
• Eliminating fees and increasing guarantees for small businesses that borrow through major SBA programs in 2010. The President called for the elimination of fees and an increase in guarantees for loans through the Small Business Administration, a measure that extends provisions in the Recovery Act through the end of 2010. In addition, the President called for continued Treasury efforts to use the TARP to support small business lending.

Greg
December 11, 2009, 1:12 am

Thanks for posting my comments. Contrary to your flippant remarks, Obama is not the crisis; He is the clean up guy with the mop, after 8 years of Bush. You seem more intetersted in tax cuts for the rich than anything else. Welcome to progressive taxation. It works. You want a flat tax? Wont work. More importantly for you, any businessman that alienates a majority of the public by denigrating the president is one of questionable judgement.

Bee
December 14, 2009, 9:27 am

Jim, how have Bush’s tax cuts helped thus far? Just curious why we’d be better off making them permanent. Also, you’re confused, Obama is pushing for a capital gains tax cut for investment in small businesses.

http://www.washingtonpost.com/wp-srv/politics/documents/obamasmallbusinessrescueplan.pdf

Ted
February 2, 2010, 4:15 pm

RE: SBA loans. Have you ever gotten a loan? Yes, SBA loans take a lot of paperwork to get, but lots of small businesses get them. To say that an business person would “never” get an SBA loan is just silly. My mother opened her business in 1989 with an SBA loan. My brother in law used an SBA loan to purchase his business, then later used another one to purchase his building. I used an SBA loan when I purchased my business 5 years ago, and will likely use another one when I buy a building. SBA loans only require 10% down when buying a building, as opposed to at least 20% for regular business loans, sometimes 30%. When you are talking about a million dollar building, that’s a huge difference. As other posters have pointed out, your post is wrong on a lot of points, and SBA loans are one of them. Perhaps a little research is in order before you write your next post.

May 11, 2010, 10:52 pm

Took me ages to find this post, this time I’ll bookmark it.

July 14, 2010, 3:52 am

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March 24, 2011, 11:58 am

How can the Republicans justify continues funding of these wars and at the same time slash the budget from the Department of Ed?

April 3, 2011, 2:38 pm

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April 10, 2011, 12:29 pm

What an interesting article! Where can I find more information? Thanks a lot!

April 15, 2011, 5:56 pm

I think this is all because of the recession all over the world to support them . This was necessary for small business to survive.

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