Small businesses have been caught in a vise of tightening credit and shrinking capital since the beginning of the recession. While the economy is showing some signs of recovery, most small firms are far from out of the woods because consumer spending remains at a record low and unemployment is hovering near 10 percent.
It may take months or even years before markets return to normal, yet a number of key tax measures that have helped small firms survive the downturn are set to expire, touching off a scramble on Capitol Hill to get them extended. The franchise industry, one of the biggest beneficiaries, has taken the lead in the lobbying effort as the clock winds down on several key tax incentives.
More than 900,000 franchised establishments dot the country. These businesses are responsible for creating 21 million jobs and generating $2.3 trillion in economic output, according to a recent study by the International Franchise Association. The industry, like the small business sector as a whole, will be one of the key engines of growth as the economy gains steam.
“Since the economy went into recession, Congress has enacted numerous provisions that have helped small businesses avoid some of the worst effects of the downturn,” said IFA Chairwoman Dina Dwyer-Owens, who testified recently before the House Small Business Committee. “The nation is only now starting to see signs of recovery, and those fragile businesses that operate in your communities need these programs to continue.”
Indeed, more than 25 major tax incentives are scheduled to expire in 2009, according to the Joint Committee on Taxation, and more than 85 temporary tax incentives that have been extended from year to year are scheduled to expire, or “sunset,” by the end of 2010.
In addition to her duties with the IFA, Dwyer-Owens is chairwoman and chief executive of The Dwyer Group, which franchises six service industry businesses, including Rainbow International Restoration and Cleaning, Mr. Rooter Plumbing, Aire Serve Heating and Air Conditioning, Mr. Electric, Mr. Appliance, and Glass Doctor. Collectively, the group supports 1200 franchisees in the United States and Canada, and an additional 300 businesses in seven other countries.
Among the provisions on the chopping block, Dwyer singled out the bonus depreciation provision of The Emergency Economic Stabilization Act of 2008. It extended, for tax years 2008 and 2009, the 15-year straight-line recovery method for qualified leasehold and restaurant improvements. The act also added a 15-year depreciation schedule for new construction and improvements placed in service in 2009. But the group wants the provisions extended at least through 2010.
“Extending this provision will entice franchise business owners to reinvest in their brick-and-mortar facilities. This will create a tremendous spill-over effect on other industries,” she told the committee.
The Bureau of Labor and Statistics estimates that every $1 spent on construction generates another $2.39 in economic activity; and every $1 million spent in the construction industry creates more than 28 jobs in the overall economy. According to the U.S. Bureau of Economic Analysis, restaurant industry construction spending is estimated to have created 280,000 jobs in the overall economy in 2007.
The measure is particularly important to the heavily franchised restaurant industry, which has been hard hit in the downturn and the ensuing credit crunch.
John Frenz, who operates two Montana Mikes steakhouse restaurants in Illinois with partner Greg Schmidtknecht, said the 15-year depreciation schedule makes significant capital available for restaurant owners, who can use the tax savings to make capital expenditures. “Those capital expenditures translate into jobs in the rest of the economy,” he told the committee.
“By shortening the depreciation schedule, Congress gives operators cash flow to reinvest in their businesses, allowing them to grow restaurant jobs and contribute to the community,” he said. “In an industry with median profit margins of 3 percent to 5 percent, every penny counts.”
The National Restaurant Association is also lobbying heavily for a change in the tax code that would allow businesses to deduct 80 percent of the cost for business meals and entertainment, compared with the current 50 percent limit. The committee approved the change last year, but it did not pass.
Retailers, another heavily franchised segment of the economy directly tied to consumer spending, also have been hit hard by the recession. The sector lost 535,000 jobs in 2008 and another 299,200 jobs through August 2009, according to the National Retail Federation.
The latest figures on consumer confidence suggest that a turnaround for the industry is still months away. Consumer confidence declined in September, according to the widely watched Reuters/University of Michigan survey, and more than 70 percent of those responding said they have no confidence the economy will make a strong recovery.
Retail sales for the past three months continue to show sharp year-over-year declines, with drops of 4.3 percent in August, 5 percent in July, and 3.8 percent in June. In fact, the NRF forecasts that annual retail sales will decline in 2009 for the first time since the organization’s founding more than 90 years ago.
One of the industry’s chief priorities is the extension of the net operating loss (NOL) provision in the American Recovery and Reinvestment Act, which expanded the carry back from two years to five years. The measure allows businesses to deduct current losses from profits reported in previous tax years. The act, however, limited the provision to losses incurred only in 2008.
The American Reinvestment and Recovery Act also provided important tax relief to small businesses through the Work Opportunity Tax Credit and capital gains tax relief for businesses organized as S Corporations. The Work Opportunity Tax Credit has assisted many franchise businesses in hiring unemployed veterans or youth who are not in school or already employed, according to Dwyer-Owens.
In roughly two months, a wide range of tax provisions, from research and development credits to clean energy incentives will also sunset for small firms. It’s critical for Congress to extend these provisions. Not only will they help speed the recovery, but they could mean the difference between survival and failure for countless small businesses.