Over the past week, starting with the State of the Union Address last Wednesday, President Obama has been speaking a lot about doing more to help the nation’s small business owners.  The question is whether or not the President is proposing real relief or more of the same lip service that small business owners have been getting over the past year.

Small Business Tax Credit. One of the big highlights of the Presidents speech was where he proposed a new small business tax credit that would go to small businesses who hire new workers or raise wages.  Generally speaking, small business owners would get a portion of the new worker’s salary or existing worker’s raise back as a tax credit – effectively allowing the government to subsidize a portion of this person’s salary.    As general policy goes, I hate the idea of the government subsidizing anything.  However, if they are going to help someone with subsidies to help create jobs, small businesses are where it should be.    After all, its better than spending $533,000 to create each temporary job, as we did with the Stimulus Bill.

Elimination of All Capital Gains Taxes on Small Business Investment. Wow!  This sounds great!  Except for one thing.  When someone invests in a small business, they typically invest for the long-term.  While this policy would mean well, will it really create a flood of investment into the small business market?  After all, these investments could indeed be subject to capital gains taxes again when they are sold 5, 10, or 20 years down the road.  Don’t get me wrong – I like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place.

Therein is the underlying problem that I have seen with using Capital Gains rates to encourage investment all along.  Altering the tax rate in the short-term does little to spur on long-term investment.  The problem is that the tax rate is determine based on when an investment is sold – not when the investment is made.  If I invest $100,000 into a new business venture today, what will the tax policy be 15 years from now when I sale the small business?    If the President and Congress want to spur investment, they need to allow taxpayers to “lock-in” a zero-percent capital gains rate at the time they make the investment – not years later when it is sold.  Investors like certainty.  Little certainty equals little investment.  Greater certainty equals greater investment.

I do like the idea of lowering the Capital Gains rates because it will allow great investment capital to those people who are likely to invest in the first place.  I applaud the President for this proposal.  I just happen to like it for slightly different reasons than he does.

Small Business Lending Fund. President Obama is now promoting a $30 billion fund that will be specifically designed for the nearly 8,000 small community banks (those with assets of $10 billion or less) to loan money to small businesses in hopes that it will spur job growth.   Interestingly, many in the banking industry say that the extra funds will not help lending.  They say that banks with plenty of money to lend are having trouble finding credit worthy borrowers and that small business owners are holding off on expansion and improvements due to the sluggish economy.

If a business participates in the loan program, does it subject that business to more regulation and government control?  If so, the loan may not be worth it.

Much of the success of the program will revolve around how much control the federal government wants to exercise over the program participants (the banks) and what kind of regulations the government places on the banks.    An easy example of this are the underwriting guidelines for these loans.

The federal government will have to change drastically from the ARC Loan program for small businesses if they want it to succeed.  (See prior posts, ARC Loans are Ready to Go – If You Can Find A Lender and What Ever Happened to ARC Loans?)  The ARC Loan program was a complete failure by any measure.  It was amazing to me how many SBA Lenders had never even heard of it.   A big reason for its failure was the stringent underwriting guidelines placed on the banks for a very low-profit loan for them.  They had no interest in underwriting a loan that was simply not profitable for them – even with little or no risk.

While the above three proposals are a step in the right direction, they ultimately do not solve the underlying issue.  Small business owners rarely make decisions based solely on tax results.  Regardless of whether there is a credit available, most small business owners are gong to be reluctant to hire or borrow money until they see their business moving in the right direction.

In excerpts of a speech from today that were released by the White House early, President Obama states that “Jobs will be our No. 1 focus in 2010. “  Well, that sounds spectacular, Mr. President.  I am not sure why it was such a back burner item in 2009, but at least we can look forward to 2010.  Or, are you just paying us lip service again?  Only time will tell.  In the meantime, kudos to the President for at least proposing some small business relief.

Dear Mr. President:

As a CPA who focuses on helping small business grow to their potential and stay afloat, I am writing to you to express my concerns.  It appears that my clients and many other business have somehow been missed on your list.  My clients have strong efforts and challenging times, but somehow are not “bailoutable” under your plan.  If their heads are managing to stay above water, the new stimulus bills and continued focus on the wrong ways to stimulate our economy have added a cement block to the top of their heads to push them under.

Big businesses like General Motors and Chrysler used to be small businesses at one point.  At that time, there was no ability to bring cars in from overseas to compete, so their product was necessary and very sellable.  The world has changed a lot since then.  We have the freedom to choose cars that bring the highest quality and best prices to the market and people have spoken.  The high cost of our labor force and its inflexibility has made this not be a viable business in the US.  We used to decide on viable business opportunities based on the economic principals of “supply and demand.”  Somehow, this theory has been eliminated under your rule in office.  I think it still works if our economy will let it. 

I beg of you to allow General Motors and Chrysler and any other industries in our economy to sink or swim.  We have always had rules of doing business that worked — like pricing based on supply and demand, paying labor the “going market rate” for their skill level, and innovation from a necessity to compete.  I see all of these fundamentals going out the window when the government steps in to bailout specific businesses or industries.  Are jobs from companies that can no longer compete in the market place really the future of our country?  We don’t make textiles here in the US any more — our world has evolved.

Just as I would with my clients, the advisors of GM and Chrysler should sit down and reinvent themselves to be viable, self-sustaining, and profitable entities.  The first thing I do with my clients is a breakeven analysis and then decide where the chopping ax should land first if costs have to be cut.  We look at the ability to be competitive.  What are their strengths and weaknesses?  If they are overspending, they must stop. 

The alternative if the business cannot make the necessary changes is and always has been bankruptcy to reorganize debt or close the doors and “shut’er down”.  That may not be the answer they want to hear, but sometimes the ship has to sink. 

As one of the few Americans that actually pays into the national income tax system, I want my vote.  I know several other companies that are viable businesses and that are much more “bailoutable” than your picks.  I want my tax dollars invested in the entrepreurial spirit that invented this country and re-invests in it every day.  My CPA firm as well as my clients’ businesses don’t want more government intervention or your bailout money.  We just want to see our tax dollars be used wisely and here is how I suggest you do this:

1.  Use real world rules for doing business:  If I give you money for your business venture, you should have a plan to show me how it will be paid back and it should be a great idea for a business that is needed and will be profitable.

2.  Inspire our population to work harder, not get lazier.  If we work harder, then we should receive more reward, not less.  

3.  Call a spade a spade.  Tax rebates and credits are only rebates or credits if you pay taxes.  Otherwise, it is Welfare.  That is a whole different department and should not be confused.  Welfare should be for temporary hardships, not a handout that continues a lifetime. 

As a frustrated American, I am realistic enough to know this letter will go no where and will not change your attitude or outlook.  I want you to listen because I hear similar frustration day after day from everyone I talk with.  I don’t understand how so many smart people can revolutionize our country with bright ideas, but then the exact opposite is what actually happens in our “democratic” society.  I am powerless except in my own world.

Sincerely worried about our country and freedom,

Donna L. Bordeaux, CPA