The election is finally over, and as the dust settles, it’s time for some accounting. How will small businesses fare under an Obama administration? Smart Answers columnist Karen E. Klein asked three experts—Bill Rys, tax counsel for advocacy group National Federation of Independent Business; Jay Sumner, labor law attorney with the law firm of Littler Mendelson; and John Arensmeyer, executive director of advocacy group Small Business Majority—to comment about issues important to entrepreneurs, including taxes, labor policy, and health care. Edited excerpts of their conversations follow.
Toward the end of the campaign, Obama put forward a small business emergency rescue plan. While it’s not set in stone, the principles indicate some of President Obama’s small business policy priorities. What are some of the highlights?
Bill Rys: His tax plan keeps the 2001 tax rates in place and extends them [rather than extending the Bush Administration's tax cuts of 2003]. It also extends business tax incentives based on tax code section 179—that are scheduled to expire in 2008—through 2009.
In his stump speech, Obama talked a lot about cutting taxes on individuals earning less than $250,000 a year. How does that threshold impact small business owners?
Rys: Well, 75% of small business owners have organized their companies as pass-through entities, meaning that they pay taxes at the individual level. So we did a survey at the end of 2007 that asked small business owners how much they earn from their businesses, and about 10% reported that they make more than $250,000. When we broke that down by how many employees they had, about 30% of those with 20 to 250 employees said they make more than $250,000 in taxable income. What the survey concluded is that regardless of the tax rate, small business owners draw a considerable amount of income from their businesses, and if a higher tax is placed on that income, they will have to make tough decisions about where to cut business investments.
Will it be helpful to extend the Section 179 tax incentives, which allow businesses to take an immediate deduction for the full value of qualified purchases on things like trucks, copiers, and manufacturing equipment, as Obama’s plan advocates?
Rys: Let’s get some background: The current limit on those deductions is $125,000, but last year, as part of the economic stimulus bill, they increased it to $250,000 for purchases made in 2008. That is supposed to expire at the end of 2008, but Obama’s proposing to extend it through 2009. In 2003, when the limit was $25,000 and it was increased to $100,000, IRS data showed that the amount of depreciation deductions taken in that year represented the largest increase ever. So a lot of businesses did make investments in equipment during that year, based on IRS stats, and anytime you increase those limits, it’s certainly helpful for small businesses in particular.
My concern now is whether small businesses really have the money to make those kinds of investments with their sales decreasing and many entrepreneurs reluctant to make expansions. I’d recommend locking in the higher dollar amount past 2010, and then, as we start to see the economy recover, it would send a nice signal to small business owners that as things pick up for them, they’ll have a tax incentive they can rely on to do some investment at that time.
What other tax changes do you hope the new administration will put in place that will help small companies?
Rys: In general, when it comes to small business owners and taxes, we try to stress the importance of simplicity. The cost of tax compliance on small business owners can be especially onerous, because they don’t have in-house tax departments like big businesses do.
http://www.businessweek.com/smallbiz/content/nov2008/sb2008117_087748.htm?chan=smallbiz_smallbiz
