The Senate is focusing on passage of a bill (S. 2237) that purports to help small businesses. It would give them a tax credit for expanding payroll and allow them to take 100% bonus depreciation for certain equipment purchases (rather than the 50% write-off that’s currently in effect for 2012). Would this be a good law?
It’s time that we analyzed whether tax incentives really induce the intended action. The problem is that there are existing counterweights already in the tax law to the proposed incentives. Let’s take a look at the first proposal -- a tax credit for expanding payroll by taking on new workers or raising pay for existing workers.
Qualifying for this tax credit will cut or eliminate eligibility to claim the small employer health tax credit. This other credit, which is up to 35% of health insurance premiums paid by small businesses for their staff, is determined with reference both to:
- The number of workers (although the credit has a complex formula based on so-called full-time equivalent employees); and
- The average payroll.
The higher both of these factors go, the lower the small employer health insurance credit. The credit, which is part of the now-constitutional Patient Protection and Affordable Care Act (Obamacare), was supposed to help 4 million small businesses, but fewer than 400,000 actually claimed the credit, and of these, fewer than 40,000 qualified for the full 35% credit.
Bottom line: Enactment of a jobs credit would merely exchange one tax credit for the other in some small businesses.
Even worse, expanding payroll to 50 employees or more will trigger a business mandate under Obamacare to provide essential health coverage to workers starting in 2014. What this will cost is unknown at this time, but what is certain is that many companies that already have 45 or so employees are not growing their payrolls at this time. And, in fact, companies already over the tipping point may cut their payroll to have fewer than 50 employees.
The other provision -- to encourage investments in capital equipment by allowing a full write-off using bonus depreciation -- is another provision that may help large companies but won’t be significant for small businesses. Any business, regardless of the number of employees, the amount of revenue, or profitability, can claim bonus depreciation; it’s not exclusively a small business tax break.
On the other hand, the Section 179 deduction (up to $139,000 in 2012) is meant specifically for small businesses because the dollar limit phases out for purchases over another limit ($560,000 in 2012); large companies spending more than $560,000 in equipment purchases lose some or all of the deduction.
Bottom line: Very few small businesses invest annually more than $139,000 in machinery and equipment (including computers, smartphones, and off-the-shelf software), so again there is no need to raise the cap on bonus depreciation. Don’t get me wrong; 100% bonus depreciation would be a nice break, but it is not essential for small companies at this time.
FYI: NFIB’s small business optimism survey for June shows that only about half of small companies expect to make capital expenditures in the next six months and, of those that do, about 20% represents vehicle purchases (which have their own tax rule limitations).
Good policy or bad distraction? This tax bill, labeled as being for small businesses, belies the fact that it really won’t matter much for its intended target: small businesses. In my opinion, it won’t incentivize action. What’s really needed to help small businesses is tax certainty (not rules that expire year after year) and continuation of the current tax rates.