Tax Breaks, Incentives for Businesses in President's 2011 Budget

By Gerard Panaro, Howe & Hutton, WSTDA Legal Counsel

The president’s 2011 budget contains several items of interest for businesses such as WSTDA members. Of course, these are only the Administration’s proposals and to take effect, they must be enacted by Congress. This article briefly summarizes four proposals:

IRC §179 deduction for purchase of business equipment
$5,000 tax credit for hiring new workers or raising pay of existing workers
Small Business Administration credit
Elimination of capital gains tax on investments in small business

IRC §179. Sec. 179 of the Internal Revenue Code allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. That means that if you buy (or lease) a piece of qualifying equipment, you can deduct the full purchase price from your gross income. Almost all types of business equipment qualify for the deduction, including machinery, computers, software, office furniture, vehicles and other tangible goods.

The Economic Stimulus Act of 2008 increased the limits on the §179 deduction to $250,000 on $800,000 worth of purchases. It also added a one-time “bonus depreciation” on equipment that exceeded the $250,000 deduction limit. The American Recovery and Reinvestment Act (ARRA) extended these limits through 2009. (In a December 2009 speech to The Brookings Institution in Washington DC, the president said: “Building on the tax cuts in the Recovery Act, we’re proposing a complete elimination of capital gains taxes on small business investment along with an extension of write-offs to encourage small businesses to expand in the coming year.”)

For the 2010 tax year, §179 allows businesses that spend less than $530,000 a year on qualified equipment purchases to deduct up to $134,000 with no “bonus” depreciation. Sec. 179 is set to expire in 2011. However, in his State of the Union address, the president called for extending the “temporary enhancements” to §179 through the 2010 tax year end. Apparently, this will include expanded limits on §179, including a 50% “bonus depreciation.” (Source: Section179.org.)

$5,000 tax credit for new hires/raises. In a speech he gave in Baltimore, Maryland on January 29, 2010, the president noted that he had called upon Congress to pass a jobs bill which would include a tax credit for companies that add workers or increase salaries in 2010. The president explained his proposal: employers would get a tax credit of up to $5,000 for each and every employee that they add in 2010 and would get a tax break for increases in salaries as well. If the employer raised wages for employees making under $100,000 a year, the government would refund the company’s payroll taxes for every dollar by which the company increased the wages faster than inflation. Employers would receive the tax credits every quarter, as opposed to waiting a whole year to see it benefit their taxes. The president also noted that there would be safeguards against allowing businesses to “game the system.” He gave this example: a business would not get a tax credit for doubling its work force while cutting the hours of each worker in half. Finally, the president noted that the House has already passed a jobs bill with some of his proposals and he said he expected the Senate to do the same.

Access to credit through the SBA. The 2011 budget provides funds to support $17.5 billion in SBA 7(a) loan guarantees that will help small businesses operate and expand. (The SBA itself does not make loans. It guarantees loans made to small businesses by private and other institutions (e.g., banks and other lending institutions). The 7(a) program is SBA’s primary and most flexible loan program. Financing is guaranteed for a variety of general business purposes. It is designed for start-up and existing small businesses and is delivered through commercial lending institutions. (Source: www.sba.gov)

The 2011 budget also supports $7.5 billion in guaranteed lending for commercial real estate development and heavy machinery purchases; $3 billion in Small Business Investment Company debentures to support new businesses and new jobs through early-stage and mezzanine small business financing; and $25 million in direct microloans, for intermediaries to provide small loans to emerging entrepreneurs and other promising, but “un-bankable,” borrowers. In addition, the budget proposes to significantly increase the maximum loan sizes on SBA loans, including an increase from $2 million to $5 million for 7(a) business loans, to further improve small business access to credit.

Elimination of capital gains tax. Finally, to create an incentive for long-term investments in the small business sector, the budget eliminates capital gains taxes on long-term investments in many small businesses. The American Recovery and Reinvestment Act temporarily increased the exclusion to 75 percent. The budget proposes to raise this exclusion to 100 percent, meaning that no income tax whatsoever would be paid on these investments in the nation’s small businesses.

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