Congress Debates How to Stimulate Small Business Activity

The House and Senate economic stimulus bills take different approaches on how to help small businesses do their part in pulling the United States out of recession. The …

The House and Senate economic stimulus bills take different approaches on how to help small businesses do their part in pulling the United States out of recession. The two leading small business associations have outlined other proposals they wish Congress would consider as well.

The small-business sections of the House-passed bill focus on encouraging lending under the Small Business Administration’s two main loan programs. Among other things, the bill would:

  • provide $426 million for new SBA lending in its 7(a) program and loan guarantees under the 7(a) and 504 programs, and raise the limit on 7(a) guarantees to 95 percent of the loan;
  • establish secondary market lending authorities within the SBA to make loans to broker-dealers who operate the SBA secondary market and guarantee pools of 504 loans sold to third-party investors;
  • provide $100 million to the Rural Business-Cooperative Service for grants, loans and loan guarantees; and
  • allow refinancing of some SBA loans.

The measure under consideration in the Senate focuses more on raising SBA loan limits rather than creating new programs within the SBA. For example, the Senate version would:

  • raise the maximum 7(a) loan amount to $3 million (from $2 million);
  • simplify the formula for determining the maximum leverage available to small business investment companies (SBICs) by setting it at 300 percentĀ of private capital or $150 million ($175 million for low-income geographic areas), whichever is less, and allow successful SBICs to operate a second or third fund, with the leverage maximum set at $225 million;
  • raise the maximum 504 loan sizes to $3 million from $1.5 million for loans that meet job creation or community development goals, to $3.5 million from $2 million when meeting a public policy goal, and to $5.5 million from $4 million for small manufacturers; and
  • allow refinancing of some SBA loans.

The two measures include similar tax benefits for small businesses, including extending the 2008 increase in small business expensing of capital costs under Section 179 for two years and the 50 percent bonus depreciation for new plants and equipment through 2009. They also would provide a number of tax benefits for production and use of clean energy.

The Senate bill also includes other tax relief and incentives, such as allowing individuals to exclude from income 75 percent of their gains on small business stock held for more than five years (up from 50 percent under current law). In a move to help businesses that cancel or repurchase their debt for less than its adjusted basis, creating “cancellation of debt income,” the Senate measure would allow those enterprises to spread their income from the debt cancellation out over four years.

Shlomo Katz, a government contracts lawyer with Brown Rudnick’s Washington, D.C., office, noted that the small business loan provisions in the two bills carry very different price tags, with the House provisions estimated at $426 million and the Senate measure estimated at $621 million. He noted that the House measure focuses on making money available by regulating the market for SBA loans, lending money to people who buy the loans and also lending money to the secondary market-makers. In the Senate, he said, the focus is on making it easier for people to invest in small businesses.

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“The Senate’s approach is more in promoting investment than in handing out money,” Katz said. “On the other hand, the Senate is willing to make more money available to make this all possible.” However, he also noted that with the House bill, “it’s pretty clear where the $426 million would go. With the Senate’s $621 million, it’s harder to say.”

Katz advised caution on raising SBA loan limits, saying, “One interesting aspect is that you can’t put too much money into the hands of a small business because then it will stop being a small business. I’ve seen this happen before, where they grow up too fast and stop being eligible for assistance, and they’re not ready for it.” But he applauded the legislation’s aim of infusing money into small businesses to stimulate the economy. “Any money that gets into their hands that’s wisely spent is a good thing,” he said.

Associations’ wish lists

The National Federation of Independent Business (NFIB) criticized both the House and Senate bills, saying they would provide limited relief or incentives to small business. Of the House bill, NFIB said it “instead spends massive amounts of taxpayer dollars on programs that have little to no connection to economic growth or job creation.” Commenting on the Senate bill, NFIB said that supporting SBA lending programs and providing tax incentives “is not enough. Investment incentives to fuel a recovery must be coupled with significant short term relief to help small businesses and their employees through the current economic crisis and then build a sustained recovery in the future.”

NFIB called on Congress to add a six-month payroll tax holiday for small businesses and their employees to the stimulus legislation. Such a move “would immediately put money back into the hands of consumers while simultaneously decreasing the cost of labor paid by employers. This is a sensible provision that will provide real help to small business owners,” the association said.

The National Small Business Association (NSBA) recommended several other provisions be added to the final stimulus bill. NSBA’s proposals would:

  • increase or remove the interest-rate cap SBA imposes on lenders;
  • mandate that banks receiving any future funding under the Troubled Asset Relief Program (TARP) dedicate at least 25 percent of those funds to expand their small-business lending;
  • mandate that 23 percent of any infrastructure stimulus funds be contracted out to small businesses;
  • exempt self-employed individuals’ health insurance payments from taxation; and
  • provide an additional $2.3 billion for small-business research and development and commercialization funding in fiscal 2009.

NFIB also criticized a Senate proposal to expand unemployment benefits to individuals looking for part-time work, saying this would “increase the outlays from the program which are likely to be replaced with payroll tax increases in the future.”

The small business provisions of the stimulus legislation are not front-and-center in the debate over the two vastly different measures offered by the Senate and House. That debate rightly centers on whether the stimulus package should target so many long-term policy goals of the new administration and how much to put into government spending versus tax relief.

Even so, the two chambers’ differing approaches to stimulating small business is indicative of the problem Congress will have in sending an economic stimulus package to the president’s desk. Stay tuned.


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