Small Business Jobs and Credit Act — Why It Isn’t Working

It was touted as a huge jobs creator and big boost to small business. But after its passage, the Small Business Jobs and Credit Act of 2010 is still not working.

Indeed, it got off to a bad start, and analysis of federal data showed the number of bank loans as of that year to small business dropped to the least number since 1999.

After analyzing figures from the Federal Deposit Insurance Corp., the Investigative Reporting Workshop indicates that aggregate bank lending increased. However, small business loans of $1 million or less was down.

In essence, the law came with a $30-billion fund to help community banks loan money.

It provided tax breaks in the aggregate of $12 billion.

The goal was to stimulate entrepreneurship – investment and job creation. Democrats claimed it would result in 500,000 new jobs.

The theory behind the tax cuts: Companies can buy new equipment, and the self-employed can reduce their self-employment taxes by writing off their healthcare expenses.

Small businesses will be able to waive Small Business Administration (SBA) loan fees, which is a big deal for companies struggling with cash flow issues.

But it increases tax-reporting requirements.

Small businesses have been patiently waiting for loan opportunities – they’ve been struggling in this tight credit market. For qualifying businesses, it’s time to see a good CPA.

Not to give tax advice or to oversimplify, here’s a brief summary of the provisions:

Depreciation – The law extends bonus depreciation for equipment and for specified property with long production periods.

Startup Expensing – It increases the startup expensing limit and phase-out from $5,000 and $50,000 to $10,000 and $60,000, respectively.

General Business Credit – In accounting-techniques terminology, if businesses meet a test for average gross receipts, they will qualify for an allowance of five-year carrybacks, 25-year carryforwards, and will be exempt from the alternative minimum tax with the general business credits. That’s providing they make $50 million or less (for sole proprietorships, partnerships and non-publicly traded corporations).

S Corporations – If a business converts to an S status, it might qualify to be excused from a built-in tax gain.

Qualified Small Business Stock (QSB) – It’s possible to get a 100 percent capital-gain exemption on QSB stock.

Transaction Penalties – Penalties for failing to report transactions will be capped.

Healthcare Deduction – The self-employed can deduct healthcare expenses.

Retirement Accounts – Certain retirement accounts can be rolled over into Roth accounts.

Annuities – Annuity owners of nonqualified annuities receive tax benefits under certain conditions.

Levies – Federal contractors will have their payments levied if they haven’t paid their federal taxes.

Reporting – Renters will be required to report payments more than $600.

So what’s the impact of the law?

It’s been heavily touted as a magical economic solution. True, a lot of small established companies have been helped – but the big banks that benefited from the controversial bailout have been hoarding their cash. So, the law is widely accepted, but not by everyone.

“The Small Business Jobs Act should have been a vehicle to pass meaningful reform for every small business in this country. Instead politics trumped helping small business, and senators failed to pass the Johanns amendment which would have fully repealed the onerous new 1099 reporting requirement included in the healthcare law,” said Susan Eckerly, senior vice president of the National Federation of Independent Business.

“This bipartisan amendment represented a real chance for senators to fix a costly and burdensome paperwork requirement that lawmakers on both sides of the aisle agree must be repealed, and it’s disappointing that this amendment is not part of the bill passed today,” she added.

Why the law doesn’t work

After talking with businesses that extend credit to other businesses and consumers – my sense in 2010 was and still is – the law will not spur a big increase in jobs.

Most small businesses cannot possibly qualify for the SBA loans because of poor cash flow, too many write-offs, bankruptcies or low credit ratings – thanks to the predatory behavior of big banks and credit card companies that hiked interest rates up to 38 percent on unsuspecting borrowers in recent years.

Nothing was done to rectify the damage.

The federal government cannot require banks to give money to struggling companies that lack sufficient capital. In reality, many small businesses need operating capital now. But borrowing money for operational expense is a non-starter. Down the road, such borrowers are unlikely to be able to repay loans. Business borrowers gave to prove they don’t need money in order to qualify.

Few, if any, startups qualify for bank funding even with SBA guarantees, if they’re not highly collateralized. They usually need a successful, three-year track record. The startups have to turn to other sources, such as venture capitalists or angel investors.

As for the new tax benefits, they will not help a company if it doesn’t have abundant capital and has too many write-offs from a lack of profits.

“Moving forward, we urge Congress to continue to focus on small business issues by eliminating the uncertainty over taxes,” added Ms. Eckerly. ”If Washington wants small businesses to resume their traditional role as our nation’s job creators, Congress should extend all expiring tax rates, pass meaningful estate tax reform and repeal the 1099 reporting requirement.”


So, don’t expect a lot of hiring from this law – the prediction 500,000 new jobs was unrealistic. It still is.

It doesn’t help the majority – small businesses struggling with poor sales, victimized by predatory lenders and hampered with credit issues. To the established companies with abundant capital, please accept my congratulations. But for all others, good luck! It will be an arduous process, but keep on trying. What other option do you have?

From the Coach’s Corner, here are related resource links:

“A bank is a place that will lend you money if you can prove that you don’t need it.”

-Bob Hope


Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.

Seattle business consultant Terry Corbell provides high-performance management services and strategies.