The Tax Deal: A Much Needed Short-Term Boost for Small Business

Last Updated Dec 8, 2010 3:13 PM EST

There's good news in the politically fraught tax compromise -- at least for the next two years.

In short, Monday's deal "will help keep more cash in the hands of America's small business owners," says National Small Business Association (NSBA) Chair Larry Nannis -- cash that they will be able to reinvest in the form of business growth and jobs.

Small business associations pretty much across the board, including the U.S. Chamber of Commerce, the National Federation of Independent Business (NFIB), the National Association for the Self-Employed (NASE) and the NSBA, applauded the compromise as a positive and necessary step for the 23 million small business owners in the U.S.

Come 2012, of course, a lot of these benefits will come into question again... but for now, they'll provide a much-needed shot in the arm to get businesses growing again.

So what benefits does the compromise provide for small business owners? Here's a recap:

A Plan
Once finalized, the deal will give small business owners at least some certainty over tax liability over the next two years. As the clock wound down to the end of the year -- and the expiration of Bush-era tax cuts -- business owners had no idea what kind of tax bill they would face after 2010, making it difficult to plan for new investments and hires.

A "Workable" Estate Tax Compromise
It's not the estate tax holiday of 2010 -- cue the jokes about "accidental" deaths before New Year's -- but the terms of the new deal exempt estates worth up to $5 million for individuals and $10 million for couples, and imposes an estate tax rate of 35 percent. The estate tax was scheduled to be reinstated in 2011 with a rate of 55 percent, and exemptions only up to $1 million.

One thing to keep in mind, though: It may not be indexed for inflation and if the cut gets extended beyond 2012, that could be an issue. "A $5 million extension today is relatively reasonable," notes the NSBA's VP of Public Affairs Molly Brogan. "In 15 years that's going to be really different."

Extension of Current Capital Gains Tax Cut Rates
The plan would hold the tax rate for most capital gains and dividends at 15 percent for the next two years.

R&D Credit
The deal revives for another two years the federal research and development tax credit that expired at the end of 2009.

AMT Patch
The agreement makes inflation adjustments to the alternative minimum tax, preventing 21 million households from facing a tax increase.

Equipment Deductions
The terms of the deal would allow companies to deduct the full cost of investments in equipment in 2011, instead of depreciating the cost over several years.

Payroll Tax
Wage earners across the board will get a two percent tax cut in payroll Social Security Taxes in 2011, giving American employees an extra $120 billion next year. While small business interests had been hoping to see a broader tax holiday that included employers, Brogan says that the employee tax still gives business owners who are really struggling a little wiggle room. "You can keep a little extra money in your pocket without affecting your employees' bottom line," she says.

But the news isn't all good: The agreement also provides $56 billion in unemployment benefits for the long-term unemployed for another 13 months. That will add a big tax burden to owners, says Susan Eckerly, senior VP of the NFIB.

And then there's that 1099 reporting requirement, which goes completely unaddressed. Under the provision, which passed as part of the healthcare legislation earlier this year, starting in 2012 businesses will have to issue a tax form for each and every transaction or accumulation of services totaling over $600.00 in a single tax year -- a large burden of paperwork that could seriously affect small businesses. Both the NFIB and the NSBA want Congress to consider repealing the requirement by the end of the year.

Elise Craig has written for BusinessWeek, MarketWatch and washingtonpost.com. She is an alumna of the UC Berkeley Graduate School of Journalism and Georgetown University, and a huge fan of Hoya basketball.
Flickr photo courtesy of Phillip, CC 2.0

  • Elise Craig

    Elise Craig has written for BusinessWeek, MarketWatch and washingtonpost.com. She is an alumna of the UC Berkeley Graduate School of Journalism and Georgetown University, and a huge fan of Hoya basketball.