Obama tax breaks: Limited help for small biz

By Catherine Clifford, staff reporter


NEW YORK (CNNMoney.com) -- President Obama's plan to offer $200 billion in tax breaks for businesses that invest in plants and equipment would likely have only a limited impact on most small businesses, experts say.

Obama has been pledging for months to help small firms, but a small business jobs bill that could unlock credit and spur hiring has gotten stuck in Congress. Legislators vow to take it up next week.

The president's new proposal would allow businesses to write off the full amount of capital investments made through the end of 2011, retroactive to Sept. 8, the day it was announced.

Normally, businesses that buy anything from a new tractor to specialized machinery can deduct the cost of their investment over a number of years. The new plan would return a chunk of cash to firms all at once -- money they could then use to stimulate the economy.

Only a game changer for a few: Thanks to tax breaks that have been in effect since the 2008 stimulus package, small businesses can write off up to $250,000 in such investments in a single year, through the end of 2010. If the Small Business Jobs Act manages to pass, that benefit would be extended through 2011 and the maximum would double to $500,000. Given that, Obama's newest proposals would really only change the game for big spenders, observers say.

"While the increased expensing limits for business investments may help some businesses, most small businesses aren't making expenditures that exceed the current $250,000 expensing limits," said Bill Rys, tax counsel at the National Federation of Independent Business.

Tax write-offs are not what Main Street needs right now, other small business advocates say. Todd McCracken, CEO of the National Association of Small Businesses, says that passing the Small Business Jobs Act and extending the Bush era tax cuts are more important for small businesses than equipment tax write offs.

Because small businesses are so varied, it's unlikely that any single proposal would get support from or benefit all of them. Some observers say Obama's plan puts the cart before the horse -- that small businesses need more credit before they can think about expanding.

Incentive for a bigger factory: The proposed tax write-off could motivate small manufacturers to invest in machinery and factories sooner than they would have otherwise.

Michael Horsburgh, president of the family-run Ridgid Paper Tube Corp., would like to move into a bigger facility -- which could run him near $1 million -- with new machines. Horsburgh says Obama's proposal could push him to do so more quickly to take advantage of the tax write-off.

"I think it definitely helps us make a decision one way or another," said Horsburgh, whose Wayne, N.J.-based firm makes paper tubes, like the ones inside paper towel rolls. "It has a lot to do with timing -- whether we would do it now or later."

Still, he said the tax write-off alone wouldn't be enough to sway him to make such a big equipment purchase -- he'd also need to know he could get financing. "When you hear of these incentives and you have the support of a local bank, then you go ahead and take that risk," Horsburgh said.

Demand for loans: But many small businesses can't get enough financing to make investments right now, tax credit or not. Joe Sena, president of SphereWerx, a Hicksville, N.Y.-based pop culture marketing company, said his company's growth is being stifled by tight credit.

The firm, which makes and sells action figures and associated apparel, launched in 2005. He'd like to add to his staff of 10, but says without looser credit, he's not ready to.

"Our productivity has improved to the point where we have to [hire] but we are not ready to take the plunge on full staffing," said Sena. "Most businesses are probably able to hire but they are too scared to do it and I am probably in the same position."

Sena said the past few years have been "frustrating" because the market for his company's products have grown, but tight credit has limited SphereWerx's ability to grow along with it.

"As much as our opportunities expand, our credit is pretty much stuck at where we were at the early part of our business," Sena said.

Income tax breaks also key: Beyond the investment tax credits, many small business owners also want an extension of the Bush-era income-tax breaks on high earners, currently set to expire at year-end. Since 75% of small business owners pay their business taxes at the individual level, according to surveys from the NFIB, a hike in the individual tax rate could raise their business's tax bill.

"It is extremely difficult for small business owners to plan for future investments or new hires when they are unsure what their tax liability will be next year," said Rys at the NFIB. To top of page

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