Are Tax Breaks What Small Businesses Need from Congress?

As Congress debates the best devices to stimulate the economy, small business owners should ask themselves what they really need to improve their business now.  Direct tax cuts for business are helpful, but only if they actually wind up benefiting business.

The American Recovery and Reinvestment Tax Act of 2009 (H.R. 598), which passed the House Ways and Means Committee on January 22 and is expected to be voted on by the full house on January 28, contains $275 billion in tax cuts.  One of these cuts: retain for 2009 and 2010 the increase in the first-year expensing (Sec. 179) deduction that had been allowed for 2008.  This would let small businesses write-off the cost of equipment purchases in 2009 up to $250,000 (instead of the $133,000 set to be effective). 

The problem with this legislative largesse is that it looks good on paper (and members of Congress who support the measure can boast about it), but it doesn’t help most small businesses. The last thing most struggling businesses will do is make capital investments, even though tax incentives are available.  And even if they do make these purchases, they may not be able to enjoy the deduction; they have to be profitable to do so.

What would be better?  Most small business owners would say it’s important to restore consumer confidence so spending will pick up.   Most likely, this can only happen when consumers stop worrying about losing their jobs.  Of course, they can’t gain confidence in their jobs unless the companies that employ them start selling so they don’t have to make layoffs.  This vicious cycle isn’t easily broken.

The Senate Finance Committee on January 26 released its version of a stimulus package, providing $365 billion in tax cuts and additional spending projects not all that different from the House version.  In the end, it may be the fact that action is taken, rather than the substance of that action, that helps to restore consumer confidence and get the economy back on track.

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