Small Biz Tax Incentives Take Center Stage

BOSTON (TheStreet) — President Barack Obama focused part of his State of the Union address proposing tax incentives for small businesses, acknowledging that, lately, "it seems like bad behavior on Wall Street is rewarded but hard work on Main Street isn't."

While tax cuts, if Congress passes them, might spur growth at companies with fat order books looking to reduce costs, they would provide little solace to broken businesses that have no money left to spend.

The president reiterated initiatives he introduced in a speech at The Brookings Institute in December. He proposed tax breaks for small businesses that hire new employees and raise wages, and "while we're at it, let's also eliminate all capital-gains taxes on small-business investment and provide a tax incentive for all businesses, large and small, to invest in new plants and equipment," he said.

Taxes are a concern for small businesses, rating second only to poor sales as the most important problem they faced last year, according to a January report from the National Federation of Independent Businesses, which surveyed 830 small-business owners. Bill Rys, tax counsel for the NFIB, says tax cuts may encourage small businesses on the fence about whether to add employees, but only if they see the benefits right away such as rolling deductions into payroll taxes.

"We've suggested for about a year now, since when we were debating the first economic recovery bill, that a payroll-tax holiday would provide a lot of relief," Rys says.

Tax incentives might not be enough to spur capital expenditures. Only 18% of surveyed business owners plan to buy equipment in the next few months, according to the NFIB.

"Capital equipment and facilities purchases tend to be major decisions for small businesses that require building a business case, cash-flow analysis and a good bit of advance planning," says Ron Seide, president of Summit Data Communications, a small technology hardware business in Akron, Ohio that has increased its workforce by 30% in the past year. "If the business case and the cash isn't there, no amount of tax breaks will result in an expenditure on new capital equipment and facilities."

And tax incentives won't help companies that can't justify new employees because there's no work for them to do.

"Every person and business would like to keep more of the money they make," says Dave Shulman, one of six employees at The Environmental Technology Center, a small electronics-systems integrator in Boston. "That being said, taxes are not causing the problem for small businesses. The decline in business is the major issue for small businesses. For a small business, sales drive the company. Everything else is a high-class problem. If there's no work, there's no money and no taxes."

Obama acknowledged that small businesses are dangerously short on funds and offered a proposal similar to that of the Bank on Our Communities Act of 2009, sponsored by Oregon Sen. Jeff Merkley, which is under Senate consideration. Obama proposed taking $30 billion of the money repaid by bailed-out Wall Street banks such as Citigroup (Stock Quote: C) and AIG (Stock Quote: AIG), and using it to fund small-business loans from community banks to "give small businesses the credit they need to stay afloat."

"When you talk to small-business owners in places like Allentown, Pa., or Elyria, Ohio, you find out that even though banks on Wall Street are lending again, they're mostly lending to bigger companies," Obama said. "Financing remains difficult for small-business owners across the country, even though they're making a profit."

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