President Barak Obama has proposed another way to “help” small businesses, what amounts to an accelerated depreciation program for non-real estate investments, but is it really going to make a difference? This is a temporary tax benefit that lasts only for 2011. Supposedly this will help a business, but the entrepreneur does not exist in a vacuum. It takes real money to invest in equipment and business infrastructure. It is only through these types of investments that the business owner can garner the depreciation write-off; but again, only for 2011. As I mentioned in a previous post, a closer analysis shows this one-time break actually does nothing long-term to help businesses. And now Scott Shane, professor at Case Western Reserve University, is also questioning the benefits in an article in the Bloomberg Businessreport.
Any large investment must yield return on capital and productivity boosts for years in the future. In other words, the purchase of a piece of equipment must produce a long-term benefit greater than the final cost of that equipment. If the business owner is considering spending the cash they have been 'hoarding' - or saving, while they try to calculate the costs due to the multitude of new regulations promulgated by this administration - they may conclude the risk is too great if the returns are not substantive and sustainable for a large part of the equipment's life span. They will then decide to continue to hold on to their money in the face of the new health care bills, cap and trade, employee costs and the effects of the new financing bill, while at the same time trying to figure out if they can get financing to build their own businesses.
Professor Shane points out, rightly, that business are already able to depreciate these investments over 3-20 year periods already. Is it worth it to a business to put all that deduction up front, especially when most businesses are currently losing money or barely getting by? Besides, as he so rightly points out, very few businesses make large-capital investments simply for tax reasons. They invest because they see a long-term return on the money from increased productivity, higher sales, or increased profits. Besides, they can already deduct the first $250,000 already, and this will increase to $500,000 for 2010 and 2011 under the new jobs bill.
Of course, there is also the issue of the huge tax increases that will take place in 2011. So if a business owner does try to make a go of it into the 2011-2015 time period and buy equipment, they face the effects of these taxes one year after the temporary benefits of the one-time write off. It takes years to pay off equipment and recover its costs through productivity, just as it takes years from employees to reach their optimal skill levels. Getting a quick fix of write offs is not going to induce a business owner into a false sense of security that he will keep the majority of rewards from his hard work and investment.
What would be the best way to spur small businesses and improve the economy? As we have already seen twice during this economic malaise - in both 2008 and 2009 - accelerated depreciation is not the answer. Professor Shane suggests, and I concur, that keeping the current tax structure and NOT allowing the expiration of tax breaks for those making more than $250,000 would go farther to improving our situation than any artificial “breaks.” This was explained exceptionally well by Kevin Hassett and Alan Viard of the American Enterprise Institute in an opinion piece in the Wall Street Journal earlier this month.
If anyone is going to bring us out of the current economic crisis, it will be the small business owners and entrepreneurs who have an amazing belief in themselves and in the free market system. And there is good news for these people with the movement of the Senate’s version of the Small Business Jobs Bill, with its extension of the higher SBA Loan guarantees. If you are an entrepreneur or small business owner and you would like to learn more about how an SBA Loan can help you move forward, contact me and we can go into the details.
Any large investment must yield return on capital and productivity boosts for years in the future. In other words, the purchase of a piece of equipment must produce a long-term benefit greater than the final cost of that equipment. If the business owner is considering spending the cash they have been 'hoarding' - or saving, while they try to calculate the costs due to the multitude of new regulations promulgated by this administration - they may conclude the risk is too great if the returns are not substantive and sustainable for a large part of the equipment's life span. They will then decide to continue to hold on to their money in the face of the new health care bills, cap and trade, employee costs and the effects of the new financing bill, while at the same time trying to figure out if they can get financing to build their own businesses.
Professor Shane points out, rightly, that business are already able to depreciate these investments over 3-20 year periods already. Is it worth it to a business to put all that deduction up front, especially when most businesses are currently losing money or barely getting by? Besides, as he so rightly points out, very few businesses make large-capital investments simply for tax reasons. They invest because they see a long-term return on the money from increased productivity, higher sales, or increased profits. Besides, they can already deduct the first $250,000 already, and this will increase to $500,000 for 2010 and 2011 under the new jobs bill.
Of course, there is also the issue of the huge tax increases that will take place in 2011. So if a business owner does try to make a go of it into the 2011-2015 time period and buy equipment, they face the effects of these taxes one year after the temporary benefits of the one-time write off. It takes years to pay off equipment and recover its costs through productivity, just as it takes years from employees to reach their optimal skill levels. Getting a quick fix of write offs is not going to induce a business owner into a false sense of security that he will keep the majority of rewards from his hard work and investment.
What would be the best way to spur small businesses and improve the economy? As we have already seen twice during this economic malaise - in both 2008 and 2009 - accelerated depreciation is not the answer. Professor Shane suggests, and I concur, that keeping the current tax structure and NOT allowing the expiration of tax breaks for those making more than $250,000 would go farther to improving our situation than any artificial “breaks.” This was explained exceptionally well by Kevin Hassett and Alan Viard of the American Enterprise Institute in an opinion piece in the Wall Street Journal earlier this month.
If anyone is going to bring us out of the current economic crisis, it will be the small business owners and entrepreneurs who have an amazing belief in themselves and in the free market system. And there is good news for these people with the movement of the Senate’s version of the Small Business Jobs Bill, with its extension of the higher SBA Loan guarantees. If you are an entrepreneur or small business owner and you would like to learn more about how an SBA Loan can help you move forward, contact me and we can go into the details.
Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com, on LinkedIn, or at 888-666-9722
Join our email list and you will immediately receive two free reports and a video interview showcasing a restaurant, tavern sports bar & bowling alley funded with an SBA Loan. 
Comments