In roughly a month and a half, voters will elect the next president. No matter who wins — Democrat Barack Obama or Republican John McCain — the nation’s new chief executive and Congress will face a daunting agenda of economic issues.
They will not only have to deal with the immediate crisis — faltering credit markets, failing banks, and the sour real estate market — but also will have to make tough decisions about a slew of tax incentives that have expired or are set to expire by 2010, including the Bush administration tax cuts. Without action, the measures will sunset and be lost.
“This is terrible tax policy, and makes it extremely difficult for any business, especially a small one, to budget and plan for the future,” said Rep. Steve Chabot, R-Ohio, the ranking minority member on the House Small Business Committee. “However, these temporary tax credits are critical for small firms to grow and create the jobs that help to strengthen our economy.”
Indeed, small businesses have a critical stake in the outcome of this debate. Many of the expiring incentives are designed to encourage investment, spur research and development, and generally help small businesses do what they do best — create jobs. But no one should assume that Congress and the next administration will automatically see the wisdom of extending these important incentives.
When the new administration and Congress convene in January, special interest groups will be lobbying fiercely to protect their turf in the face of the severe economic crisis. In this looming anything-goes scramble, small business owners will need to vigilant, or issues important to them could fall through the cracks.
Over the past several weeks, the House Small Business Committee has held hearings on a broad array of issues that will be vying for attention in the next Congress. The Bush tax cuts have received a lot of attention already, but here are some lesser known tax provisions, in no particular order, that may impact small businesses.
Research and Development Tax Credit: An initial R&D investment of $1 million or a little more, recurring each year, generates about $11 million to $12 million in revenue each year for about five to seven years. This is about $50 million to $75 million in revenue over a product’s life cycle, according to Leo Berlinghieri, chief executive and president of MKS Instruments, a high-tech firm in Andover, Mass. The R&D tax credit is an important incentive to keep this value-added work in the United States, he adds.
Commercial Solar Energy Investment Tax Credit: The credit is a critical incentive for companies to locate their solar energy manufacturing facilities and projects in the United States. If extended, the solar energy ITC is expected to create almost 40,000 more jobs and $8 billion in investments, according to a recent study by independent consulting firm Navigant Consulting.
“Other nations have very generous incentive packages for solar energy and are leading in investment in this area,” Berlinghieri recently testified. “There is no doubt that our country will be a user of solar energy. The question is whether we will be a producer of the technology or will we have to rely on others.”
The Biodiesel Tax Incentive: The incentive was enacted in 2004 as part of the American Jobs Creation Act. It provides a $1 per gallon blenders excise tax credit that can be claimed on biodiesel produced from virgin vegetable oils and animal fats. Biodiesel produced from yellow grease or second-use oils, such as restaurant grease, qualify for a 50 cents per gallon excise tax credit.
In 2004, when the incentive was initially enacted, the U.S. produced 25 million gallons of biodiesel fuel, according to Manning Feraci, a lobbyist for the National Biodiesel Board. In 2007, that number rose to 500 million gallons, and the board anticipates that production will exceed that amount in the current year. The 500 million gallons of biodiesel produced in 2007 displaced 20 million barrels of oil.
Restaurant Building Depreciation: The restaurant industry is lobbying to restore a 15-year depreciation schedule for new restaurants and improvements. Of the nation’s 945,000 restaurant/food-service outlets, seven out of ten are owned by a single proprietor.
“Depreciating property over a shorter amount of time has a direct impact on a restaurant’s bottom line by allowing a restaurateur the immediate cash flow to reinvest in their business,” according to Joe Clements of Clements Management, LLC, which owns nine Burger King restaurants.
The restaurant industry won the tax provision in 2004. But in an example of how incentives can’t be taken for granted, the industry lost it three years later when a provision to renew it was cut during budget negotiations. In January, the depreciation schedule reverted to 39-and-a-half years.
Commercial Building Tax Deduction: This deduction encourages the use of energy-efficient equipment and design techniques in new and existing buildings. It’s set to expire on December 3, unless Congress and the president authorize an extension.
The New Markets Tax Credit: The provision is designed to encourage private capital investment in eligible low-income communities. It encourages new investment in underserved areas that would not occur in the absence of these credits. Many of these communities are already feeling the effects of the economic downturn.
Brownfields Remediation Expensing: The Section 179 brownfields remediation expensing provision, which is set to expire, allows property developers to deduct the expenses of brownfields cleanups rather than require them to be treated as a capital improvement. The provision makes it more feasible to redevelop old factory sites and other moderately contaminated sites, usually in depressed economic areas.
Last In, First Out Accounting: Commonly referred to as LIFO, it allows businesses to calculate profits using the most recent materials purchase prices as opposed to their oldest material purchase under the First In, First Out or FIFO accounting. This would give businesses some relief in the face of current, rapidly rising commodities prices. Legislation is currently under consideration to eliminate LIFO accounting.
Renewable Energy Production Tax Credit: The credit has expired three times since it was first enacted in 1999, and is credited with being a major incentive for the development of wind power to generate electricity. The credit is set to expire again this year.
Heating and Air Conditioning Equipment Accelerated Depreciation: A bill is pending that would change the depreciation schedule for this equipment to 20 years from 39-and-a-half years for energy efficient equipment and 25 years for other equipment to better reflect the actual productive life of a typical unit and to encourage businesses to buy more energy-efficient HVAC units.
The 61,000 page tax code has long been in desperate need of a major overhaul. But lawmakers have never had the political will to make that happen. Instead, they have enacted these temporary tax-relief measures, which must be renewed year after year. It’s an imperfect system, but right now it’s the only system we have. These incentives take on even more importance now because they can spur investment that will lead to an economic recovery. Let’s make sure the best of the best survive for yet another year.