The Wall Street Journal
By: Martin Vaughan and Corey Boles
August 19, 2010
Small-business legislation pending in the Senate would aid some profitable firms with tax breaks, but opinions are mixed on the extent to which it would help get credit flowing again.
Peter Fiske, chief executive and founder of Pax Water Technologies, based in San Rafael, Calif., said unclogging the credit markets is the single most important thing Congress could do to benefit small businesses.
"We have been shunned by banks that in 2007 would have gladly extended us credit," Mr. Fiske said.
He said the company, which sells clean drinking water technologies to municipalities, has put on hold the hiring of two new employees because of a lack of access to credit.
The Senate bill would inject up to $30 billion into community banks through purchases of preferred stock. Banks, which would have to volunteer to participate in the scheme, could get a lower repayment rate if they increased lending to small businesses.
Senate Majority Leader Harry Reid (D., Nev.) hopes to pass the bill in September, but the bill has languished for months in the Senate as Democrats and Republicans bickered over issues that are only tangentially related, such as what to do about the estate tax.
President Barack Obama Thursday called on Congress to pass the bill, charging that GOP opposition "stands in the way of small-business owners getting the loans and the tax cuts that they need to prosper."
Some owners of small firms are skeptical the lending provisions will bear fruit, saying that most businesses are just too leveraged to take on more debt.
"If there aren't creditworthy borrowers out there, it doesn't mean anything," said Ray Pinard, president and chief executive officer of Boston-based 48-hourprint.com, a web-based commercial printer.
Most Senate Republicans have opposed the lending fund, charging that it amounts to another federal bailout.
Credit issues aside, some small firms strongly back tax breaks in the Senate bill.
In particular, some tax advisers to small firms say they are eager for a proposal that would allow them to use research and development tax credits to reduce their alternative minimum tax liability. Under current law, R&D and other so-called general business credits can only be used to reduce regular income tax liability, not the AMT.
"We had a cosmetics company that was inventing new processes to sell their product on the Internet, and they spent tens of thousands to do so. We had to tell them, 'Guess what? You're in the AMT, so you get no credit,'" said Jeff Resnick, managing partner at the New York-based Resnick Druckman Group.
Joshua Hayes, tax partner in charge at the Eide Bailly accounting firm, said several firms he has worked with, including a chicken farm in the Midwest and a Phoenix manufacturer of industrial equipment, were prevented from claiming R&D credits because of the AMT.
"Congress wants to (encourage) people to spend on R&D, and they don't want this backdoor AMT to stop them," said Mr. Hayes.
The provision would only be in place for the 2010 tax year. The non-partisan Joint Committee on Taxation estimated it would reduce tax revenues by $1 billion, but the real effect could be several times that because that estimate assumes that the R&D credit is not in place for 2010. The credit expired at the end of 2009, but Congress is likely to renew it retroactively.
Another tax break in the bill that could help small businesses is a temporary increase to $500,000 from the current cap of $250,000, in the amount of new equipment purchases that can be deducted as expenses.
The next milestone for the small business bill is a Sept. 14 vote, the day the Senate returns from its summer break, on an amendment from Sen. Mike Johanns (R., Neb.) to repeal a tax-reporting requirement for small firms.
Following that vote, Mr. Reid will try to get Republicans to agree to vote on a few more amendments and have a final vote on the bill. A test procedural vote at the end of July failed to attract a single GOP vote in favor of advancing the bill.
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