Recent Developments in Funding and Tax Aid For Small Businesses

 

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) into law. The Recovery Act provides small businesses with a combination of funding provisions and tax incentives intended to create jobs and catalyze investment in the U.S. economy. In response to the Recovery Act and in an effort to help unlock the secondary markets for small business loans, the U.S. Treasury, on March 16, 2009, issued a press release announcing new programs and guidelines specifically targeted at increasing lending to small businesses (the “Treasury Release”). Several of the most relevant provisions in both the Recovery Act and the Treasury Release are outlined below.

On May 1, 2009, the U.S. Small Business Administration (the “SBA”) expanded the size eligibility requirements for small businesses seeking certain SBA-backed loans. Small businesses are now eligible to apply for SBA 7(a) loans, the most commonly-used SBA loan, if their tangible net worth does not exceed $8.5 million and if their average after-tax income does not exceed $3.0 million for the previous two fiscal years. Under this alternate size standard, more than 70,000 additional small businesses could be eligible to apply for SBA 7(a) loans. This change should provide small businesses with greater access to capital and should allow additional small businesses to take advantage of the funding provisions in the Recovery Act.

 

Small Business Funding Provisions

 

The Recovery Act provided $730 million to the SBA and made changes to the SBA's lending and investment programs in order to more effectively aid small businesses. This funding is allocated to higher loan guarantee percentages, loan fee reductions, loan refinancing and current and new SBA programs. The Treasury Release announced that the Treasury is prepared to purchase up to $15 billion of securities backed by loans from the SBA's 7(a) program and securities connected to the SBA's 504 loan program. These purchases should provide liquidity to lenders, allowing them to quickly recycle capital and make additional loans, and should increase the effectiveness of Recovery Act's small business funding provisions.

 

Increased Loan Guarantee Percentages

The Treasury Release provided that, as of March 16, 2009, any lender who participates in the SBA's 7(a) loan program can request a guarantee of up to 90 percent of the value of each 7(a) loan. This higher guarantee percentage decreases the lender's risk and provides greater assurance that an active secondary market will exist to purchase their loans.

 

Loan Refinancing

The SBA is now authorized to use the 504 Certified Development Company Program to refinance existing loans on fixed assets. Proceeds from 504 loans must be used for fixed asset projects such as: (1) purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping; (2) constructing new facilities or modernizing, renovating or converting existing facilities; or (3) purchasing long-term machinery and equipment. The Recovery Act also authorizes refinancing for certain SBA loans so borrowers can expand their businesses on more favorable terms, and it expands the leveraging capabilities of Small Business Investment Companies.

 

Reduction of Loan Fees

Pursuant to the authorization provided in the Recovery Act, the Treasury announced that the SBA would temporarily eliminate the Certified Development Company processing fees for all new, eligible 504 applications, temporarily eliminate the up-front fees for 7(a) loans, and provide refunds for any borrowers or lenders that paid these fees after the passage of the Recovery Act. By reducing the transaction costs for small businesses, the Treasury hopes that these measures can create jobs, support community development and provide small businesses with easier access to credit.

 

Small Business Tax Incentives

Five-Year Carryback of Net Operating Losses

Prior to the passage of the Recovery Act, businesses were generally allowed to carry back net operating losses (“NOLs”) from one year and use them to offset taxable income earned during the prior two years. “Eligible small businesses” are now allowed to offset taxable income with an “applicable 2008 NOL” as far back as five preceding taxable years. For purposes of this provision, an “eligible small business” generally refers to a business taxpayer whose average annual gross receipts do not exceed $15 million, and an “applicable 2008 NOL” refers to a NOL that arises during a single taxable year that either ends or begins in the 2008 calendar year. The Joint Committee on Taxation estimates that this measure will create $4.7 billion worth of increased liquidity for small businesses by September 30, 2009.

 

Cancellation of Debt Income

Income from the cancellation of indebtedness has traditionally been recognized and taxed as ordinary income in the year the cancellation of indebtedness occurred. The Recovery Act now allows certain cancellation of indebtedness income which is realized in 2009 or 2010 to be taxed over a five year period beginning generally in 2014.

 

Extension of Bonus Depreciation

Small businesses can now deduct 50% of the cost of certain depreciable tangible personal property, computer software, qualified leasehold improvements and certain other property that was placed in service in 2008 or 2009. In general, qualified leasehold improvements are improvements made to the interior of a non-residential property and that are made pursuant to a lease.

 

Increase in Small Business Expensing

Small businesses can write off up to $250,000 of computer software and tangible personal property purchases made during 2009, providing such businesses with a tax incentive to invest and create jobs.

 

Decrease in Estimated Tax Payment Requirements 

Small businesses are now allowed to reduce their estimated tax payments from 110 percent of their previous year's taxes to only 90 percent of their previous year's taxes. The Treasury expects this provision to increase liquidity and allow small businesses to more accurately predict their tax liability in these difficult economic times.

 

If you have any questions regarding these initiatives or the information contained in this Alert, please contact John Oehmke, Downey Brand's Corporate, Securities & Tax practice group leader or your usual contact at the Firm.

 

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Please note that the information contained in this letter is not intended to provide specific legal advice. You should consult with an attorney and not rely on any information contained herein regarding your specific situation.