More On Tax Planningfrom The Advisor's Professional Library
- Selected Provisions of the American Taxpayer Relief Act of 2012 The experts of Tax Facts have produced this comprehensive analysis of selected provisions of the American Taxpayer Relief Act of 2012 (the Act) to provide the most up-to-date information to our subscribers. This supplement analyzes important changes to the tax code with emphasis on how these developments impact Tax Facts’ major areas of focus: Employee Benefits, Insurance, and Investments.
- Precious Metal Taxation Precious metals can be used to better diversify a portfolio but can be volatile. The tax implications of investing in these types of assets vary depending upon the situation.
On September 23, in a 226-186 vote, the House approved a $42 billion bill to provide aid to small businesses. The legislation includes $12 billion in tax breaks and would create a $30 billion facility to expand credit access to small businesses. No Republicans supported the bill in the House, while 16 Democrats voted against the small business legislation. Many of those Democrats, including Reps. Frank Kratovil (D-Md.), Stephanie Herseth-Sandlin (D-S. Dak.) and Baron Hill (D-Ind.), face tough re-election prospects this fall.
[Treasury announced "State-by-State Funding Allocations” on Oct. 8.]
Small businesses will benefit from increased credit from community banks as well as tax relief. But these benefits are likely to be overshadowed by other factors: Banks have to be healthy enough to lend, and small businesses have to demand the loans. The bill’s tax credits, while helpful to many small businesses, will probably not guide business decisions to expand and grow the economy. Supporters of the Senate’s version say the bill will indirectly affect small-business growth and job creation. The bulk of the legislation calls for the Treasury to make investments in community banks, but the incentives for those banks to increase small-business lending would be weak.
All of the tax breaks in the bill would increase 2010 GDP by a mere 0.05%.
Key provisions of the Senate bill include:
1) Small Business Lending Fund
The $30 billion Small Business Lending Fund, to be established at the Treasury Department, would tend to the business of investing in so-called community banks. These financial institutions have assets equal to or less than $10 billion. The size of the equity stake is small, ranging from 3% to 5% of risk-weighted assets, allaying concerns about government influence over banks’ lending decisions.
In return for the preferred equity stake, banks would be required to pay the Treasury a 5% dividend payment. Over a two-year period, this rate declines on a sliding scale based on increases in banks’ small-business lending portfolios. The more these banks lend to small businesses, the smaller the dividend payment to the Treasury. For example, if a bank increases small-business lending by 2.5% , its dividend payment to the Treasury declines to 4 %.
If the opposite is true, payments go up. After a two-year period, if banks have not increased small-business lending, the dividend payment increases to 7%. The program also has a pricey incentive built in to encourage banks to repay the Treasury and get out of the program: After four-and-a-half years, dividend payments on all participants in the program leap to 9%.
The program is structured, however, in a way that leaves the Treasury with few teeth to ensure that community banks are using Treasury funds to increase small-business lending. While banks that increase lending to small businesses pay the Treasury a smaller dividend payment, there is no financial penalty for failing to increase lending during the first two years. This does little more than encourage banks to participate in the program.
The bill also provides $900 million
for a State Small Business Credit Access Fund to supplement state programs to increase and support small-business lending.
2) Tax Breaks
This part of the bill is intended to encourage business investment and hiring to the tune of $7.7 billion for advanced depreciation and tax deductions for qualifying investments in property. But the impact of the tax breaks may be limited: They extend existing stimulus programs that expired at the end of 2009 or are due to expire at the end of 2010.
The bill also includes a tax deduction for qualifying investment in personal property, such as restaurants and retail space. This extends existing stimulus legislation to 2010 and 2011, and significantly raises the threshold for the tax write-off.
The largest tax incentive would allow small businesses to accelerate the depreciation schedules for qualifying capital investments. This would reduce tax liability for 2010 and is intended to encourage them to invest more during the rest of this year. This bonus depreciation was passed in 2008 and was extended by the Recovery Act for 2009 and 2010 for qualifying projects.
3) Tax Code Changes
The bill includes more than a dozen changes to the tax code that would increase small businesses’ access to capital and reduce their tax liability. However, these measures remain a relatively small portion of the overall legislation, and there are forecasts of $4.3 billion in tax breaks over 10 years.
The most costly new tax provision allows small-business owners to deduct the cost of health insurance when calculating the self-employment tax. This measure is among the largest of the tax breaks in the bill, costing the government $2 billion over 10 years.
The breaks also include the elimination of the capital gains tax on the sale or exchange of small-business stock, a provision that has received significant attention. By reducing the tax liability for investors, the measure encourages equity investment in small businesses, thus increasing businesses’ access to equity capital.
Measures to decrease small businesses’ tax liability include a provision that would allow the general business credit to be carried back five years, reducing past years’ tax liabilities.
Another provision enables small businesses to deduct business credits against the Alternative Minimum Tax (AMT).
Other provisions in the legislation would reduce fees, increase market access and establish a credit access fund for state-run lending programs. One would eliminate fees associated with loans made by the Small Business Administration. Another would temporarily increase the deduction for business startup costs from $5,000 to $10,000 for 2010 and 2011.
Aside from the lending and tax perks, additional programs are intended to increase small-business competitiveness in international trade by promoting exports and market access.
Differences Between the House and Senate Bills
While it deleted and changed very little, the Senate did make significant additions to the legislation, particularly regarding measures to increase business investment and cut small-business taxes.
The Senate nixed one program that appeared in the House legislation to promote early-stage business investment and reduce the maximum deduction for business startup costs from $20,000 to $10,000.
The most significant additions by the Senate are the tax breaks on investment, the carry-back of the general business credit, the AMT tax, the healthcare deduction provision, the Small Business Administration fees elimination and measures to promote exports.
Other provisions added by the Senate collectively account for less than $1 billion over the next 10 years and are likely to have a minimal impact on small businesses or the economy.
In Part II of "The Impact on Small Businesses of the Jobs Act," Speiss, writes about the economic impact of the Small Business Jobs and Credit Act of 2010 on small businesses.