By Cliff Ennico

A couple of weeks ago, President Obama signed into law the American Recovery and Reinvestment Act (ARRA) – a giant stimulus package designed to help lift the United States out of recession.  While most of the media attention on the ARRA has centered on infrastructure spending and tax breaks for individuals, you’ve probably seen less information on what the package includes for small businesses. 

Which is no surprise, because there isn’t much there.

I recently had the chance to discuss ARRA with John D’Aquila, the founder and managing partner of D’Aquila & Company. LLP (www.daquilallp.com), a CPA and financial advisory firm that specializes in serving entrepreneurs and small businesses.  We both concluded that while ARRA is a small step in the right direction, a lot more needs to be done for America’s small businesses, which account for most new jobs in the United States.

The problem, according to D’Aquila, is a lack of small business entrepreneurs in government.  “I don’t think anyone who drafted this legislation knows what it’s like to run a company below 10 million dollars in revenue,” says D’Aquila.  As a result, no matter how well intentioned, most of ARRA’s changes are of little immediate benefit to the overwhelming majority of U.S. small businesses.

Let’s look at ARRA’s small business provisions one at a time.

Using Net Operating Losses (NOLs) to Offset Profits in Prior Years.  Previously, small businesses were allowed to “carry back” NOLS two years.  ARRA extends the “carry back” period from two to five years.

D’Aquila observes that while “C” corporations can deduct NOLs, “the vast majority of small businesses under 10 million dollars are limited liability companies (LLCs) and subchapter ‘S’ corporations” that cannot deduct NOLs.

Accelerated Depreciation and Equipment Expense Deductions.  ARRA allows small businesses to expense up to $250,000 in certain capital expenditures immediately rather than depreciating them over time.  Where depreciation is required, it allows businesses to write off 50 percent of the cost of the depreciable property immediately.

“The hard fact is that most small businesses don’t have anywhere near enough cash to buy $250,000 worth of equipment”, responds D’Aquila, explaining that “their lines of credit have dried up, angel investor capital for start up and development stage enterprises dried up completely in the fall of 2008 and the banks won’t lend to these entities as underwriting has become a lot more restrictive.”

Capital Gains Tax Reduction for Sales of Small Business Corporation Stock.  ARRA greatly reduces the capital gains tax exposure for owners of small businesses who sell “qualifying small business corporation stock” after holding it for five years. 

The problem here, according to D’Aquila, is that stock in a small business corporation is highly illiquid:  “There is no ready market for these shares, which are held mostly by founders and family members, and the capital gains tax benefit can be realized only by selling the stock and (possibly) surrendering control of the company.” 

This provision applies to new investments made on or after February 17, 2009, and the stock must be held by certain qualified investors for at least five years.  “I would have preferred to see the benefit apply to ANY investor and the holding period be two years minimum”, says D’Aquila, “making an investment in small companies more attractive for all and more flexible for eventual sale.”

So what would the ideal stimulus package for small businesses and entrepreneurs look like?  Here are D’Aquila’s recommendations:

First, an exemption from federal income, employment and self-employment taxes (FICA, FUTA and Medicare) on the first $50,000 of compensation paid to each employee and owner of any small business with less than $10 million in sales.  ,“For a typical small business in the 15% federal tax bracket, this would put approximately $15,000 in cash into the economy immediately for each $50,000 in salary, right now, today, for each owner or employee of the business,” explains D’Aquila, adding that this would also significantly reduce a small employer’s payroll tax compliance paperwork.

Next, for small businesses that provide efficient managed care health insurance or other medical benefits for their employees, allow them to deduct 200% of their annual premiums and related costs rather than the current 100%.  “Entrepreneurs rarely get the same deals large companies get on health care,” says D’Aquila. 

Last but not least, require that any motor vehicle and other equipment powered by fossil fuels must achieve at least 30 miles per gallon in order to qualify for enhanced federal tax breaks such as accelerated depreciation, the equipment expense deduction, and the sales tax deduction, to encourage use of fuel efficient or hybrid vehicles.  “We just shouldn’t be providing these tax incentives for gas guzzling SUVs and heavy trucks,” explains D’Aquila.

“Our government is ready to send cash to automakers and failing banks,” says D’Aquila.  Why not help the hardworking, cash-starved entrepreneurs who create jobs with their own money, personally guarantee most, if not all, of their business debt and have been shut off from access to capital during these difficult times?”  Why not, indeed.