The House Gets Small Business -- Where’s the Senate?

There are only a few days left before Congress recesses to begin campaigning for the mid-term election. It won’t be back until after November 4, at which time it will be a lame duck session. In the past several weeks, the House has passed a number of rules that I view as favorable to small businesses. The Senate won’t take up the measures until after Election Day.

Here are some of the bills that have passed the House:

Permanent sales tax moratorium on Internet access. Since 1998, Congress has temporarily banned states from imposing sales tax on the Internet if it had not previously done so. Now, the House voted favorably on the Permanent Internet Tax Freedom Act (H.R. 3086).

This measure would not only bar states that haven’t yet taxed access, but also eliminate sales taxes in those 7 states that did. The Senate agreed to this last year, so hopefully the law will be enacted before the end of this year.

One sticking point:  Some Senators want to expand the law to cover sales taxes on Internet sales, which would bring up a whole other issue, so passage of a permanent ban on sales taxes for Internet access isn’t certain.

Permanent research credit. First enacted in 1981 and extended 15 times, this tax break rewards companies that increase their R&D expenditures. Finally, the House voted favorably on the American Research and Competitiveness Act (H.R. 4438), which makes the credit permanent.

The White House has indicated its opposition to a permanent extension by threatening a veto; the Senate has also raised concerns about the cost of a permanent credit.

Note: In the past, the U.S. had the best tax credit in all industrialized countries, it is now ranked 27th and would move to 15th with the permanent credit.

Permanent tax breaks for buying equipment and machinery. Instead of depreciating the cost of these items over 5, 7, or longer periods, special accelerated write-offs in the tax law are designed to spur these capital investments:

  • Sec. 179 (first-year expensing) is a deduction for costs of up to set dollar limit (because of an overall annual investment limit, the rule applies only to small businesses). Last year, the deduction limit was $500,000. This year it is scheduled to be $25,000. This break entered the Tax Code through Small Business Tax Revision Act of 1958 (it was $2,000, or $4,000 for married persons each claiming a write-off), in 1981 it went to $5,000, and after 1986, $10,000. The dollar limit really started to jump beginning in 1997. You can read a complete legislative history here.
  • Bonus depreciation lets costs to be deducted in the first year up to a set percentage (over any Sec. 179 deduction). Last year, the deduction was 50% of costs; this year it is scheduled to be zero. This measure first appeared after 9-11 at 30% and has come and gone since then; it’s been as high as 100%.
  • The House voted to make the 2013 rules for both tax breaks permanent through America’s Small Business Tax Relief Act (H.R. 4457) and Act to Modify and Make Permanent Bonus Depreciation (H.R. 4718).

Analysis
In my view, a permanent law is better than a temporary one. It enables businesses to plan ahead with some measure of certainty. Of course, a permanent law can always be repealed or replaced. But when laws are only temporary, businesses have to wait out Congressional bickering before knowing what the rules will be so plans can be made.

You may recall that at the end of 2013, 55 tax provisions expired. Many of these (including the research credit, the enhanced Sec. 179 deduction, and bonus depreciation) have been continually subject to extenders. Yet 2014 is more than half over and we still don’t know for certain what the tax rules for the current year will be. Is this any way to run a government?

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