President’s Budget Proposal: How Small Business Fares

On February 14, 2011, President Obama released his $3.73 trillion budget proposal for FY 2012. How does small business make out in expenditures, tax changes, and other proposals in the budget?

Here are some good and bad aspects of the proposal.

Cuts in the SBA

Bad. The government agency that is exclusively for small business—the U.S. Small Business Administration—would see a 45% cut in its budget. More specifically, funding for Small Business Development Centers (SBDCs) would be reduced.

Good.
Funding would be continued for SBA loan guarantee programs as well as for SBA disaster loans.

Taxes

Bad. According to AP, the proposal suggests $730 billion in new taxes on businesses and wealthy individuals over the next decade. Which businesses are we talking about and who are “wealthy individuals?” For the most part, many small business owners fall into this category (more than $200,000 of income if single or $250,000 if a joint filer).

  • Income tax rates after 2012 would rise to a high of 39.6% (up from the current 35%); there would be a second, lower bracket of 36% (up from 33%);
  • Capital gains would be taxed at 20% for high-income individuals;
  • Expansion of 1099 reporting for services of $600 or more by corporations instead of just services by contractors (the horrendous 1099 reporting for both goods and services would, however, be repealed);
  • The federal estate tax rate would be raised after 2012 to 45% (up from the current 35%), while at the same time the exemption for each person would drop to $3.5 million (from the current $5 million);
  • The unemployment insurance surtax would be made permanent at 0.8% (it is currently scheduled to decline to 0.6% after June 30, 2011);
  • The "last in, first out," or LIFO, method of inventory accounting would be repealed. Even businesses that do not use this method would be impacted through higher energy costs because this accounting method is favored by energy companies.

The proposal does not aim to cut the corporate tax rate, a factor that has made U.S. corporations less competitive worldwide. The President did suggest that it be reduced, but only if the cut was revenue neutral.

Good.  The proposal includes suggestions to:

  • Expand and make permanent the research credit;
  • Make the 100% exclusion for gain from investments in certain C corporations permanent;
  • Create tax incentives for hiring and buying equipment for businesses in 20 new economic growth zones;

Bottom line

The President’s budget proposal is the first salvo in a battle over the budget. It’s my hope that Congress and the President can work together to craft a budget that reduces the deficit without putting the cost on the backs of small businesses.

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