Small Business Tax Cuts Pass, But Are They What Small Business Needs?

This week President Obama signed into law a $30 billion package of tax cuts and other measures meant to give small businesses a break on investing to expand. The package includes expanding the amount of capital investment that can be written off immediately, as well as incentives to banks to lend to small businesses. The measures may be off target for what many businesses really need -- more customers -- but that's not a problem this sort of tax change can address.

The Small Business Jobs Act (SBJA) sets out 23 separate steps, intended to give easier access to capital (such as increasing the Small Business Administration loan fund, and excluding gains on the sale of a business), and tax savings (broadening the so-called Section 179 deduction, which allows business to deduct the entire cost of some equipment, rather than having to depreciate it over time). It's all good stuff for small business people, although it's no surprise that the Chamber of Commerce is nevertheless complaining.

As far as they go, the SBJA tactics are fine. They make the cost of health care more reasonable for small business owners. And the ability to deduct more capital expenditures, up to $250,000 per year, under Section 179 should be a help -- but only for those businesses that are in a position to expand.

In general they benefit manufacturing businesses more than service business, as a result of their capital intensity, but there are also specific provisions to benefit retailers and restaurants as well as business that make leasehold improvements. And the benefits are temporary, only for a year or two.

Here is a concise summary by Robb Mandelbaum, a Chicago entrepreneur, on the NY Times' Economix blog. He also offers his opinion of the bill's impact on Small Business Administration loans, limits on which are greatly expanded.

For a reality check on what the SBJA will mean, I called my friend Doug Harpine, who owns three Subway stores in northwestern Virginia. For him, and for Subway and quick-serve restaurants in general, business is good. "At KFC, and McDonald's, and even the pizza places, which have suffered a lot, business has bounced back."

"I've just opened a new store, and I'm looking at another new location," he said. "But today the deal has to be much more of a sure thing than it was five years ago -- you just can't take the risks that you did back then."

Doug will get a direct benefit from the SBJA in his existing business. "I was planning to put in some leasehold improvements in one of my stores, some new refrigeration equipment, and my accountant said I should go ahead with it this year, to be able to deduct the cost immediately."

On small business taxes generally, Doug said he would expect little of any cuts to business owners' taxes to be put to work. "We've had to put off cost increases for so long, I imagine most business owners would decide to give themselves a break, and put any savings on taxes in their pockets." There goes one of the main reasons for cutting taxes in the first place.

But tax policy can't address what businesses say is their biggest concern, namely, a shortage of customers.