Small businesses are vital to the health of the U.S. economy. According to the Senate Committee on Finance, small and medium enterprises constitute 99.7 percent of all firms and employ nearly half of the private-sector workforce. More importantly, over 75 percent of job creation in the past decade can be contributed to small businesses.
Amid panic of a waning U.S. economy, the Committee passed a bill on January 30th that includes tax provisions for small businesses. Introduced by Senators John Kerry (D-Massachusetts) and Olympia Snowe (R-Maine), the economic stimulus package increases small business expensing for 2008, the net operating loss carry back period, and the amount of investments that businesses can write off in a given year.
Extending the “net operating loss carry back” from two years to five years will infuse financially distressed business with cash. Entrepreneurs will have the opportunity to apply losses incurred in 2006 and 2007 to profitable years dating back to 2001 and receive refunds. Besides this the bill plans to give companies a 50 percent bonus deduction on new equipment that would normally depreciate over a longer term. It would double the limit on expenses to $250,000 from $125,000 that small businesses can deduct from annual income with total cap of $800,000 over 6-year period.
The Senate Finance Committee also adopted provisions from Kerry and Snowe’s legislation that increases the amount of small business tax write offs for new investments this year. These measures combined with the recent 50 basis point Fed interest rate cut will help companies access more capital at cheaper rate and lower tax liabilities.
There’s no doubt that these factors will help the economy. However the jury is still out as to whether these provisions will propel the U.S. economy beyond just short-to-medium term economic relief.