In today's address by President Obama, we finally got to hear about incentives and help for small business. For weeks we've been hearing of the wasteful spending of the big banks that are being helped, the auto makers, other big businesses and the scandalous behavior of some of these investment banks and brokers, including fraudulent stock schemes that finally failed when the markets went Bear. Finaly we get to hear from the administration what they are going to do for those of us struggling to build entrepreneurial and start-up companies using bank loans, our own sweat equity, and sometimes venture or angel investments.
It turns out that his heart is in the right place, and though he many not be completely on the side of small business, many of his latest pronouncements are a boon and a ray of hope for those of us who employ 70% of Americans.
The basic tenets that he laid out were:
- Guarantee by the government of SBA loans up to 90%, and purchasing using some of the TARP money already allocated some of the toxic SBA loans. This will loosen credit which has recently been tightened by banks across America for small businesses looking to expand, grow, or just finance their survival.
- Elimination of costly fees for both borrowers and lenders in SBA loan arrangements.
- An immediate reduction in capital gains taxes on investments in small business by 75% if they hold their investment for 5 years. A proposal to permanently reduce to zero the capital gains tax on investments in small or startup businesses. This will greatly encourage investment in the Angel and Venture world since gains would be essentially tax-free. Making angel and venture dollars a tax free investment greatly increases the value of this vehicle over the traditional stock market investment. While still quite risky you don't also have to account for capital gains when you do cash out your investment. Small companies would be encouraged to go independent sooner as this capital gains bonus would be limited to companies with under $15M in revenue - truly rewarding the SMALL company and not the big one.
- By eliminating capital gains on small business investments, he would also (I believe) solve the problem of having to pay capital gains when a business transfers ownership either inside or outside a family. One of the great tragedies of current tax law is the number of companies that never get passed on to a family member because they can't raise the cash to pay off the capital gains on the transfer.
- Small businesses can write off addtional capital investments this year in an attempt to re-stimulate buying in this important B2B environment.
- Small businesses can write off losses from this year against taxes paid up to 5 years ago. This effectively will give companies that paid taxes in past years a rebate of those taxes if they lost money this year.
- Small businesses can pay 90% of the last year's taxes, rather than 110% when they pay estimated taxes. This increases available cash and it is realistic considering the current economy for many businesses.
In all, I believe this presents a balanced approach to the small business dilemma - freeing up loan money, reducing the tax impact of venture and angel investing and transfers of ownership, and providing immediate tax relief and cash flow to distressed small businesses are all excellent steps in the right direction. If he could go on to solve the health care dilemma, reduce business income taxation, and finalize the elimination of capital gains that would be a long way towards a small business success.