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Why the 2010 Tax Breaks WILL Make Small Businesses Hire

There's been a lot of debate lately about what will fuel the economy and create jobs. Now that we're in the midst of tax season, I'm puzzled as to why one potential strategy -- tax breaks for small businesses -- has attracted naysayers. To me, the connection is obvious: lowering taxes will jumpstart small businesses and lead them to hire more people. It worked for my company, but I'll get to that in a moment.

First, let's look at the arguments thoughtfully written by a naysayer and fellow BNET colleague Mark Henricks in his post, "Why the 2010 Tax Breaks Won't Make Small Businesses Hire." I must respectfully disagree with some of his conclusions. He argues that while recent tax modifications, such as the Section 179 expense deduction hike, may induce small firms to spend more money, they're not going to spend it on new hires.

I think this contrarian view overlooks several important factors.

Mr. Henricks seems to suggest that it's illogical to assume that a business owner will invest in new tax-deductible equipment and then use the savings to hire new workers to operate that new equipment. He writes, "How often is the tax law going to drive the size or timing of [a hiring] decision? It seems unlikely that many machinists will be hired to operate drill presses purchased thanks to the Jobs Act."

I agree with this -- but there's no rule stipulating that new jobs need to have anything to do with the new equipment. I, and I think other owners, would agree that the savings translates into extra cash. And if the money is used for marketing to juice sales, to provide incentive compensation to yield higher performance, or even to streamline a process, then the stronger balance sheet gives the business some added cash and relief to experiment with product development, new product features, new services, etc. The end result and benefit is still the same: The business will need more employees to handle the added work and incremental sales.

That was the case at my company Many of our tax breaks came from Section 179 and bonus depreciation for Web development costs and such. We saved a cash outlay of more than $500,000 last year. We're using the money to hire more people not in the departments that generated the savings, but in our call center so we can answer the phones more quickly and lose fewer calls. We're also going to be much more aggressive with advertising experimentation. That will generate more sales and in turn create even more jobs.

The added savings also allowed us to pay off bank debt used to make an acquisition. No interest expense means more money for all the above.

Mr. Henricks also argues that these tax breaks won't help the average small business, which brings in less than $1 million in annual revenue, because it's too small to reap the benefits. It's true that maybe those smaller firms do not reap the same-sized benefits as larger businesses do -- the savings are probably in proportion to the company's size. Still, a $10,000 savings is real money with real opportunities -- even if that opportunity means the founder is finally able to get some take-home cash because the business has become more self-sustaining.

Here's the bottom line for us: In 2010 we increased our head count by 40%. About a third of those new hires made us eligible to receive a rebate of employer social security taxes paid. That gave us another $19,000 in savings. We increased year-end bonuses as a result of that savings and handed out cash at an all-hands meeting.

Not every company will reap the same benefits from bonus depreciation, Section 179 deductions, or reduced payroll costs, but any decrease in taxes frees up more cash for businesses, helps them grow, and opens up more possibilities to hire.

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Photo courtesy of Flickr, by Ricardo Villela
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