Budget Includes Some Breaks for Small Business : Economy: The tax deductions and credits, which will amount to $25 billion over five years, are aimed at fostering growth.
Small and medium-sized businesses--and their investors--will reap some unexpected benefits if Sunday’s last-minute budget agreement is approved by Congress.
President Bush abandoned his long-sought goal of cutting capital gains taxes, but he insisted on some pro-growth measures that would give small business a boost.
The deal struck Sunday between the White House and congressional leaders includes a cornucopia of benefits for firms with less than $50 million in equity--a combination of paid-in capital and retained earnings.
The tax deductions and credits total $25 billion over five years--a drop in the bucket in a $500-billion budget package but a big boost for some modest-sized businesses and the people who buy their stocks.
“It’s a triple sweetener, quite a deal,” said a congressional staff aide. “The companies themselves receive breaks, and the people who buy the stock get helped both when they buy and when they unload for profits.”
The investor gets a 25% income tax deduction for stock purchased in one of these firms. If he buys $100,000 in stock, for example, he can deduct $25,000. The maximum allowable deduction is $50,000.
Taxes on capital gains from stock sales by small companies would be linked to inflation. If the consumer price level has risen 10% during the time the investor holds the stock, then 90% of the profit on the stock sale would be subject to taxes. This technique is called indexing for inflation.
“The tax break is targeted to individuals to get them to invest in these companies. The theory is that the economy is better off if we plow money into the smaller businesses,” said another congressional aide.
For the company, the budget agreement offers an array of economic goodies.
The research and development tax credit, now 20%, would be boosted to 30%. A separate credit to encourage experimentation, due to expire, would be extended through 1991.
Expensing, which allows deduction of the full price of some equipment in the year it is purchased, would be expanded to include two years.
Companies also could get a rapid write-off for additional purchases of scientific equipment.
The proposed new tax breaks apply only to companies in business for at least five years. And the firm must have a trade or business producing a tangible product. Banks, real estate agencies and other financial services firms don’t qualify.
The budget conferees also agreed to have Congress adopt an additional $600 million in unspecified “growth incentives.”
Enterprise zones, an effort to bring business back to economically devastated neighborhoods, also would receive recognition under the budget deal.
The idea of luring business back to the depressed inner-city is a favorite theme of the White House, but has never been embraced by Congress. Sunday’s agreement represents another effort to win legislative approval.
The government would issue a list of areas qualifying as enterprise zones. A business operating in the area--with a factory, distribution center or other job-creating activity--would enjoy two tax breaks. The investment would qualify for very fast depreciation under the tax laws, and the company could claim tax credits for a portion of the salaries for all workers in the zone.
The search for oil and gas also would get a boost if Congress approves the budget package. It includes a variety of technical but important tax changes.
Tax credits would be increased for expenditures on exploratory drilling. Capital spending for special techniques to recover the remnants of oil in existing fields would receive expanded tax credits. And taxes on investors in some of these energy-related projects would be eased slightly.
The energy tax breaks, which might have drawn strong opposition earlier from a Democratic-controlled Congress, have a much better chance of approval now because of the surge in oil prices resulting from the Middle East crisis.
“The President wanted something he could call a growth package, even though he lost the battle on capital gains,” a congressional aide said of the agreement between the White House and congressional leaders. “This deal represented the best he could do, and it should be attractive to the conservative Republicans who are always talking about helping entrepreneurs.”
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