New Law Provides Needed Help to Small Businesses Now and For a Limited Time

After the last couple years of bailouts for financial firms and large manufacturing companies, small business is finally getting some much needed direct relief.  President Obama signed into law this week the Small Business Jobs & Credit Act of 2010, which aims to loosen up credit for small businesses and provide immediate tax breaks to help these companies.  But many of the law's provisions are short-term measures that businesses need to understand now if they are to enjoy the benefits. Here are five provisions that may be immediately useful for your business:

1. Money to Lenders:  The law authorizes $30 billion of funds to be directed to small businesses through community banks and additional funds to state lending institutions.  This is intended to get more capital flowing and allow small businesses to borrow needed capital at reduced rates.  Check with your local bank to find out more.
2. Start Up Expense Deduction:  For startup expenses of new companies, the maximum allowable business tax deduction of $5,000 is doubled to $10,000.  But this increase is only applicable in tax year 2010.
3. Qualified Small Business Stock Deduction:  If your small business has investors looking for liquidity, now is a good time to act.  A holder of qualified small business stock can exclude 100% of the gain on the sale of stock through the end of 2010.  This was increased from the 75% exclusion that was enacted as part of the stimulus in 2009 (the normal exclusion prior to 2009 was 50%).  This provisions is also only available to Subchapter C corporations (S corporations and LLCs do not qualify).
4. Capital Expenditure Limits.  Businesses that acquire capital equipment any time through 2011 can write off up to $500,000, which is double the $250,000 available under the 2009 stimulus.
5. Health Premium Deduction.  Anyone who is self-employed can deduct as a business expense the amount of health care premiums paid in 2010 from the amount of income that is subject to self-employment tax.  Again, this provision is limited to one year.

These are just a few of the provisions intended to help small businesses.  If you own a small business, which do you think will be most beneficial to you?

Could the Recent Financial Reform Make it Harder for Your Company to Raise Funds

The recently enacted financial reform law (the "Dodd-Frank Wall Street Reform and Consumer Protection Act" for the sticklers out there) impacts a range of financial services and companies in the way they do business.  For startups and small businesses, it may just make it harder for you to raise funds.  That's because the Act changes the definition of "accredited investor" under the federal securities laws. For a bit of background, the securities laws were originally established in the 1930s amidst the Great Depression as a consumer protection initiative against excesses and fraud in the sale of securities.  Under the Securities Act of 1933, any stock or other securities sold by a company have to either be publicly registered or qualify under one of the limited exemptions.  Which means that companies can conduct limited offerings of stock to certain purchasers, and "accredited investors" fall into a special category with fewer requirements.  The logic being that they are more "sophisticated" than an average investor and can make more educated investment decisions (ed. note: this is regardless of what the last couple of years have shown).

For the past three decades, an accredited investor was any individual with a net worth of at least $1,000,000 - including the value of a primary residence - or who earned a personal income of $200,000 in the past two years (or $300,000 with a spouse) and with a reasonable expectation to repeat this year.  While the income test levels remain the same for now under the new law, the net worth test now excludes the value of the investor's primary residence. In addition, the SEC will have the authority - actually, the obligation - to revisit these amounts periodically in the future.

What does this mean for your company? From a practical standpoint, the new law means companies will need to revisit their subscription agreements and investor representations in offering documents to make any necessary changes before making any further offerings.  This should be done with the help of your company's attorney.

But the net effect is to make it harder to qualify as an accredited investor, which means that there will be fewer of them.  Since the income and net worth tests have remained at the same amounts since 1982, the effect of inflation means that many more people would qualify as accredited investors now than when these rules were adopted.  So this new law ameliorates that change to a certain extent.

But at the same time, it cuts down the available pool of potential investors in startups and small businesses.  That is a good thing in order to protect those people that technically meet the requirements but are otherwise unsophisticated investors.  But it could also result in an impediment to companies who need outside investors to grow, but won't or can't tap the more expensive institutional money available.