SMALL BUSINESS PROVISIONS IN THE
“AMERICAN RECOVERY AND REINVESTMENT ACT” (H.R. 1)

SMALL BUSINESS TAX PROVISIONS:
The “American Recovery and Reinvestment Act” (H.R. 1) includes many provisions that would be beneficial to small businesses. These include:

 Small Business Expensing. This provision would provide an extension for 2009 of enhanced Section 179 small business expensing at a level of $250,000. This provision will allow small businesses in Maine and throughout the nation to make investments in plant and equipment that they can deduct immediately instead of depreciating over a period of 5, 7, or more years.

 Net Operating Loss Expensing. The bill permits small businesses with revenues of up to $15 million to carry back losses three additional years, for a total of 5 years, for tax year 2008 losses.

 Extension of Bonus Depreciation. This bill includes an extension of bonus depreciation, which allows companies to deduct 50 percent of the cost of an investment in the year an asset is purchased, as is an extension of a provision that allows accumulated AMT and research and development tax credits to be used in lieu of bonus depreciation.

 Built-In Gains Relief. Hundreds of thousands of so called “S corporations” – America’s Main Street businesses -- may be sitting on “locked-up” capital they cannot access or redeploy to sustain or grow their businesses. The capital crunch in the market is impacting these privately held companies perhaps most acutely. The reason is that businesses that convert from C corporation to S corporation status are penalized by the Built-in Gains (BIG) tax (35 percent corporate rate on top of any capital gains, state and local taxes) for a period of 10 years if they sell any of their appreciated assets -- i.e., land, real estate, stock - acquired before they became an S corporation. This provision reduces the holding period to 7 years to provide relief.

 Small Business Capital Gains. Under current law, Section 1202 provides a 50 percent exclusion (14 percent effective tax rate) for the gain from the sale of certain small business stock held for more than five years. This provision is limited to individual investments and not the investments of a corporation. As a 14 percent effective tax rate provides little incentive to hold small business stock, given that Fortune 500 company stock is taxed at 15 percent if held for only one year, the provision allows a 75 percent exclusion (7 percent effective tax rate) for individuals on the gain from the sale of certain small business stock held for more than five years. This change is for stock issued after the date of enactment and before January 1, 2011. This provision should help spur more investment into small businesses, which is particularly critical during the credit crunch.


 Tax Withholding for Small Business. Under current law, business owners must make estimated tax payments equal to 110% of the previous year’s payment. The bill reduces this requirement to 90%.


 New Markets Tax Credit. The bill increases the credit’s allocation authority for 2008 and 2009 to a total of $5 billion. The extra allocation for 2008 alone will generate 11,000 permanent jobs and 3,500 construction jobs. Additionally, this portion of the bill includes Recovery Zone Bonds consisting of $15 billion in private activity bonds and $10 billion for refundable issuer credit bonds. These bonds will help states fund projects ranging from infrastructure to job training and could be used in BRAC-affected areas, Empowerment Zones, Enterprise Communities, and Renewal Communities, among other locations. They would be allocated to states based on job losses.

 Infrastructure Development Bonds. The bill expands the definition of “manufacturing” as it pertains to the small-issue Industrial Development Bond (IDB), program to include the creation of “intangible” property. For example, this would allow the bonds to be used to benefit companies that manufacture software and biotechnology products by helping them get the financing necessary to help their operations innovate and create new jobs. With this change, state and local financing authorities, such as the Finance Authority of Maine, could use IDBs to raise capital to provide low-cost financing of manufacturing facilities with the jobs of the future, helping to attract new employers and assist existing ones to grow. Notably, knowledge-based businesses have been at the forefront of this innovation that has bolstered the economy over the long-term. For example, science parks have helped lead the technological revolution and have created more than 300,000 high-paying science and technology jobs, along with another 450,000 indirect jobs for a total of 750,000 jobs in North America.

 Private Activity Bonds. Notably, Congress repealed the Alternative Minimum Tax (AMT) for use against housing private activity bonds as part of last summer’s housing bill, and this proposal extends that beneficial treatment to other types of private-activity bonds. This should help spur demand for these types of bonds in a time in which the nation is experiencing a credit crunch.


SMALL BUSINESS ACCESS TO CAPITAL/REFORMS TO SBA PROGRAMS:
The economic stimulus bill appropriates $730 million to improve existing SBA programs and create new initiatives that will address the current economic crisis. Below is a brief description of the most significant provisions.

 Temporary SBA Fee Relief. As a result of the financial crisis and the recession, small business lending in the SBA’s flagship loan programs – 7(a) and 504 programs – is in a freefall. The bill allocates $375 million to allow for temporary waivers or reductions in the fees the SBA charges to lenders and borrowers in the 7(a) and 504 loan programs. When determining the amount and structure of the waivers/reductions, the bill requires the SBA to give borrowers and smaller banks priority in receiving fee relief.

 Temporary Increase in SBA Guarantee Levels. The bill allows the SBA to – on a case by case basis – temporarily raise the guarantee level (up to 90%) for 7(a) loans, other than loans made through the SBA Express program. Currently, the maximum guarantee levels are 75% for loans over $150,000, and 85% for loans of $150,000 or less. The increased guarantee will provide a higher level of protection for risk-weary small business lenders who have tightened their lending standards considerably in the wake of the credit crunch.

 Business Stabilization Program. The bill will also help banks provide relatively small, short-term loans to small business borrowers experiencing immediate financial hardship. Specifically, the new program will temporarily allow the SBA to (i) fully guarantee “stabilization” loans that cannot exceed $35,000, and (ii) fully subsidize a small business borrower’s interest payments on the stabilization loan. A borrower does not have to begin repaying the stabilization loan until 12 months after receiving it, and the loan must be paid in full within 5 years.

 Microloans. The bill appropriates $30 million for the SBA’s microloan program, with $24 million dedicated to microloan technical assistance, and $6 million for new microloans. By way of background, the microloan program provides very small loans to qualifying micro-businesses (typically businesses with fewer than 10 employees) by making funds available to non-profit, community-based lenders – called intermediaries – which, in turn, make loans to eligible micro-borrowers in amounts up to $35,000. Borrowers are also provided with corresponding technical assistance to ensure that the loan proceeds are used effectively.

 SBA Secondary Market Stimulus. Many SBA lenders – in both the 504 and 7(a) programs – rely on a secondary market for SBA loans. These lenders sell a portion of the SBA loans they have already made to broker-dealers. The sales provide lenders with an important funding stream that allows them to extend additional SBA loans. The broker-dealers, in turn, pool the loans and sell them to investors in the secondary market. In the wake of the subprime mortgage crisis, the secondary markets for SBA loans have frozen. To thaw the 7(a) secondary market, the bill permits the SBA to make loans to broker-dealers. These loans would then be used by the broker-dealers to finance the purchase of additional SBA loans from banks. Another provision in the bill will help unfreeze the secondary market for “first lien” loans in the 504 program by guaranteeing pools of these loans, thus making them more attractive to risk-averse investors who have essentially abandoned all mortgage-backed securities.

 Small Business Venture Capital Stimulus. The bill attempts to stimulate the flow of venture capital in the SBA’s Small Business Investment Company (SBIC) program by simplifying the formula used to determine the maximum amount of SBA financing (“leverage”) available to SBICs. Among other improvements to the SBIC program, the bill also makes “transition” leverage available to commonly-controlled SBICs, which will allow successful SBICs to operate a second or third fund, while maintaining the safeguards necessary to mitigate the SBA’s risk in the investment.

 Surety Bond Stimulus. As a result of the financial crisis, surety companies are now rejecting bond applications because the applicants (usually contractors in the construction industry) cannot show that adequate financing is in place to complete the project. The bill will temporarily increase the SBA’s guarantee limit from $2 million to $5 million, and it appropriates an additional $15 million for the SBA’s surety bond revolving fund.

 504 Program Improvements. With credit standards tightening, many credit-worthy small businesses have been denied new or additional loans for facility upgrades. The bill would allow a small business to refinance its existing loan through a 504 loan if at least 50% of the proceeds from the new 504 loan will be spent on qualifying expansion projects. In addition, the bill expands the universe of expansion projects that would qualify for a 504 loan. Current law requires the creation of one job for every $65,000 loaned; the bill reduces that amount to $50,000.

 Paperless Lending System. The bill appropriates $20 million to facilitate the SBA’s transition to a paperless loan processing system, which will help reduce loan processing and turnaround times significantly.

 Oversight and Implementation of Stimulus Measures: The bill allocates $25 million for the additional resources that the SBA will need to properly implement the stimulus measures. The bill appropriates $10 million specifically for the SBA Inspector General’s oversight of SBA stimulus funds. The bill also requires a GAO report on the SBA’s progress in implementing the stimulus measures.