Stimulus Package to Include Incentive for Small Businesses

Small business indicators hit their lowest level in 17 years in January, but the economic stimulus package passed by Congress Feb. 7 may stop the decline.

The National Federation of Independent Business' monthly Index of Small Business Optimism fell 2.8 points in January to 91.8, the lowest reading since January 1991. The index is based on a survey of small business owners.

"This January reading is more of a recession in expectations than in hard economic data," says NFIB Chief Economist William Dunkelberg. "Hiring plans and job openings are much stronger today than in 1991."

The stimulus package aims to fight off a recession by giving consumers more money to spend and businesses more incentive to invest in new equipment. Taxpayers should receive rebate checks from the federal government in May, and businesses will be allowed to write off 50 percent of new capital investments this year.

Congress also doubled the Section 179 expensing limit for small businesses to $250,000. This break allows small businesses to write off investments in new equipment immediately instead of depreciating them over time. This saves businesses money and the hassle of keeping depreciation records.

The limit on how big of an investment a small business can make and still qualify for this break was increased to $800,000.

This means the amount a business can expense will be decreased by every dollar spent above $800,000. A small business that makes a $1 million capital investment, for example, will be able to expense $50,000 of it.

Even with a tax break, however, businesses aren't going to invest in new equipment if they don't think it will pay off in increased productivity or higher sales.

The NFIB survey found that 58 percent of small businesses reported capital outlays over the past six months, but only 25 percent plan to make capital expenditures in the next three to six months, a decline of five percentage points.

"Fear of recession could cause businesses to postpone planned capital investments," says Kenneth Bentsen Jr., president of the Equipment Leasing and Finance Association.

Bentsen and NFIB Tax Counsel Bill Rhys think the tax breaks in the stimulus package could boost capital investment, as well as the overall economic outlook. Business investment in plant and equipment accounts for at least 15 percent of gross domestic product, according to ELFA.

"The timing is good here," Rhys says. "We still are seeing some growth. ...If we can inject some incentives in there, maybe we can get that confidence to go back up." Cheaper SBA loans urged

Congress also may make it cheaper for small businesses to access capital through the Small Business Administration. A Federal Reserve Board survey found that one-third of banks had tightened their lending standards on business loans in January. About 80 percent had tightened their standards on commercial real estate loans.

Sen. John Kerry, D-Mass., has introduced legislation to provide the SBA with $150 million so it can reduce fees on its 7(a) loans, a popular source of long-term capital. The SBA approved nearly 100,000 of these government-guaranteed loans in fiscal 2007, but lending is down so far this fiscal year, which began Oct. 1.

"We're seeing the mortgage crisis have a ripple effect that's preventing many small business owners from getting loans they need to create jobs, grow their businesses and spur the economy," says Kerry, who chairs the Senate Small Business and Entrepreneurship Committee.

"By cutting fees, we can make loans more affordable and encourage banks to extend credit to a larger number of small business owners," Kerry says.

The senator also is looking at ways to boost lending through the SBA's 504 program, which provides loans for real estate and other fixed assets. Lending through that program, which has grown steadily in recent years, is flat this year.

The 504 program is the best SBA vehicle for stimulating the economy because it offers low-interest loans at a fixed rate, said Chris Hurn, president and CEO of Mercantile Commercial Capital, a 504 lender based in Orlando.

Congress could free up cash for small businesses by allowing them to refinance existing loans with 504 loans, he said.

Click here to read more.