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Small Businesses Should Act Fast – Some Incentives Set to Expire by Year’s End

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Small business is the intended beneficiary of a package of tax cuts, incentives, retirement options and loan programs that went into effect this fall.

But in some cases, business owners must act quickly to take full advantage of the aid.

Encouraging entrepreneurs is the objective of the new Small Business Act of 2010. It provides $12 billion in tax cuts and between $30 and $50 billion in direct and indirect loan help.

“This bill is the just the first step in putting small businesses at the forefront of our economic recovery,” said U.S. Senator Mary L. Landrieu, D-La., who heads committee on small business and entrepreneurship which assembled the package of assistance.

For months, lawmakers have been wrestling with the challenge of getting help into the hands of small business. Policymakers, economists and politicians agree that small business is the engine of the American economy, and its health is essential to a robust recovery. The nation’s 27 million small businesses pay 44% of the total American payroll and generated 65% of the new jobs created over the last 17 months, according to government studies.

At the heart of the legislation are incentives to start up a business, and to invest in ongoing enterprises.

A tax break on the cost of new equipment has been doubled to cover investments of up to $500,000 (without the law, it would have dropped to $25,000 next year). The ability to write off expenses now applies to leasehold and restaurant improvements, as well as off-the-shelf computer software.

In addition, “bonus” depreciation has been extended through the end of 2010. The measure gives businesses an additional $8,000 write off for the purchase cars, trucks and vans—over and above normal depreciation.

The deductibility of business start-up costs has been expanded. Costs incurred before a new venture opens its doors include market surveys, advertising, wages paid for training, travel costs and fees for professional services.

Annoying record-keeping that had required proof that cell phone use exceeds 50% before special tax treatment is allowed has been eliminated.

Of course, access to financing is the bedrock of start-ups and entrepreneurship. New provisions are designed to help put money into the hands of the businesses that can use it.

Central to the package is a $30 billion fund that has been made available to small community banks for small business funding. Regional banks with lower assets will benefit, and are given an incentive to help businesses which may have been turned down by larger banks.

The Small Business Administration’s core loan programs have been extended. The standard SBA 7a loan has been increased from a maximum of $2 million to $5 million. Through the end of the year, the government guarantee has been hiked to 90% of principal, and fees paid to the federal government for such loans have been eliminated (from about 3% of the guaranteed portion of the loan.)

The new law boosts the potential for profit from investing in the stock of small business. Investors buying qualified stock before Jan. 1, 2011 who hold it for 5 years will not pay any capital gains on the sale of the stock. To “qualify,” stock must be issued by businesses with less than $50 million in gross assets. Investment assets of the issuer may not exceed 10% in real estate or corporate securities. The IRS definition is quite complex and should be reviewed. The provision is designed to encourage individual investors, angel investors and venture capital firms.

Other provisions that may be helpful to small business and their owners include a tax break for health insurance premiums paid by the self-employed. For 2010, such premiums are deductible for self-employment tax purposes.

New options are provided for workers saving for retirement. Now, workers involved in employer retirement plans can transfer money to a Roth IRA account with no penalty. And conversion to annuities has been made simpler.

Small business still faces uncertainty over the impact of the national health care plan, which is being phased in over the next several years. And debate is already raging over whether small business owners will be affected by the planned end to Bush-era tax cuts, which mean big tax increases for the estimated 3% of the population earning over $200,000.

For now, the assistance from the Small Business Jobs Act can’t come soon enough. Recent studies have pointed to continuing pessimism over the state of the American economy by small business owners, and to an erosion of the United States status as the global leader in entrepreneurship.

And small business continues to feel the squeeze of the credit crunch, according to a new study by the Federal Reserve Bank of New York. Nearly 60% of the small businesses surveyed said they applied for credit during the first half of 2010, but only half were successful. Nearly two-thirds of companies seeking new business lines of credit—the most sought after form of financing—were rejected.

Another study noted a slowdown in entrepreneurial activities in the United States. But the government study found that a slight relative decline may be because the rest of the world has learned from America. But there is no cause for alarm.

“The United States has long been an example for the rest of the world in terms of its capacity for innovation, creation of knowledge, and growth,” and those traits keep America at the very top of global entrepreneurship, according to the SBA study.

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