President Signs Into Law Small Business Jobs and Tax Package

With only 34 days remaining before the November 2nd mid-term elections, President Obama signed into law on Monday the Small Business Jobs and Credit Act of 2010 (H.R. 5297), a bill that represents Congress’s final legislative attempt at stimulating the sluggish economy before House and Senate lawmakers leave Washington this week to finish out their reelection campaigns.

The centerpiece of H.R. 5297—and the provision which drew the fiercest Republican opposition—is the creation of a $30 billion lending fund that allows Treasury to invest in small to medium-sized financial institutions that will, in turn, be encouraged to increase small business lending. The legislation also includes roughly $12 billion in tax breaks and incentives for small businesses.

Long stalled in the Senate, H.R. 5297 was unable to muster the 60 votes necessary to overcome a Republican filibuster in late July, as a party-line vote of 58-42 failed to invoke cloture and essentially halted the bill’s movement until after Congress returned from its August recess. Upon return in September, Senate Democrats reached 60 votes by picking off the support of Republican Senators George Voinovich (OH) and George LeMieux (FL), both of whom will be retiring from the Senate after this Congress.

Below is a summary of the key provisions included within H.R. 5297:

Small Business Lending

  • Creates a Treasury-administered Small Business Lending Fund that will facilitate government purchases of preferred stock and debt securities (for one year after the date of enactment) from certain financial institutions with less than $10 billion in total assets. The dividend rate paid by eligible institutions (which includes insured depository institutions, bank and savings and loan holding companies, and select community development loan funds) will be based on the institution's demonstration of increased small business lending. Initial dividend rates of five percent on preferred stock can be reduced to one percent if the participating institution demonstrates a 10 percent increase in small business lending. However, after two years, the dividend rate can increase to seven percent if no small business lending increases are demonstrated.
  • Provides $1.5 billion in grants to states under a State Small Business Credit Initiative (SSBCI) to support lending programs to small businesses and manufacturers. The funding will be allocated using formulas based on state employment and unemployment statistics.
  • Permanently increases Small Business Administration (SBA) loan limits from $2 million to $5 million for 7(a) loans, $1.5 million to $5.5 million for 504 loans, and $35,000 to $50,000 for microloans; and temporarily increases loan limits for SBA Express loans from $350,000 to $1 million.

Tax Incentives

  • Raises the exclusion from taxes on capital gains from the sale of qualifying small business stock (stock from a C corporation with gross assets of $50 million or less) that has been held for more than five years from 50 percent to 100 percent. This provision applies to gains from the sale of small business stock acquired after the date of the bill’s enactment in 2010 and limits the gains eligible for exclusion to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation.
  • Enhances the ability of certain small businesses (sole proprietorships, partnerships and non-publicly traded corporations with $50 million or less in average annual gross receipts during the previous three years) to “carry back” general business tax credits to offset taxes paid in the previous year, by extending the carry back period from one year to five years.
  • Extends the ability of businesses to immediately write off 50 percent of the cost of depreciable property to include property purchased and placed in service in 2010. In addition, the bill increases the Section 179 expensing limits for taxpayers who elect to immediately write-off the costs of certain tangible personal property in lieu of cost recovery through depreciation from $250,000 to $500,000 beginning in 2010 and 2011; and would raise the limit at which the write-off phases out from $800,000 to $2 million.
  • Allows business owners to deduct the cost of health insurance for themselves and their family members that were incurred in 2010 when calculating 2010 self-employment taxes.

Spending Offsets

  • Aiming to narrow the so called “tax gap”, the legislation requires new IRS reporting mandates for Rental Property Expense Payments, increases the penalties for the failure to file IRS returns, and allows the IRS to issue levies prior to a collection due process (CDP) hearing on federal tax liabilities of federal contractors.
  • Restricts producers of highly corrosive fuels such as crude tall oil from being eligible for the Cellulosic Biofuel Producer Credit, which provides $1.01 per gallon for the production of biofuel from cellulosic feedstocks.
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