By Mark Battersby
The Small Business Jobs and Credit Act of 2010, signed into law in late September, will allow U.S. snow and ice management professionals to write off more of the cost of business purchases, such as equipment and machinery, in the year the purchase is made. It is, however, the part of the bill aimed at helping small businesses access capital that has drawn the most attention.
Often thought of as a lender of last resort, the U.S. government has long been an excellent source for a variety of economical financing. Those seeking Small Business Administration (SBA) loans stand to benefit from the extension of provisions that amped up SBA lending guarantee programs and fee reductions that recently expired.
The new Jobs Act increases the maximum loan size for the SBA’s programs. The maximum amounts guaranteed under the 7(a) and 504 programs will jump from $2 million to $5 million, while micro-loan amounts increase from $35,000 to $50,000. SBA Express program loans would temporarily increase from $300,000 to $1 million.
Available loan programs
7(a) Loan Guarantee Program. A 7(a) loan can be used for many business purposes, including the purchase of equipment, real estate or working capital. The biggest and most popular of the SBA’s loan program, the 7(a) Loan Guarantee Program allows general business loans to be paid back over a period that can be as long as 25 years for real estate and 10 years for equipment and working capital.
CDC/504 Loan Program. At the top end of the SBA loan size spectrum is the CDC/504 Loan Program, which provides long-term, fixed-rate loans for financing fixed assets, usually real estate and equipment. 504 loans are usually made through Certified Development Companies (CDCs)—non-profit intermediaries that work with the SBA, banks and businesses looking for financing.
Those seeking funds for equipment purchases, to buy or renovate a building or to purchase other business assets take the company’s business plan and financial statements to a CDC. Typical percentages for this type of package are 50% financed by the bank, 40% by the CDC and 10% by the snow business.
Limits on most 504 loans will rise from about $2 million to $5 million, while caps on specialized 504 loans will go from $4 million to $5.5 million.
In exchange for this below-market, fixed-rate financing, the SBA expects the company to create or retain jobs, or to meet certain public policy goals such as an Enterprise/Empowerment Zone, a minority-owned business, etc.
Small Business Lending Fund. This fund was created under the Jobs Act and will provide up to $30 billion in capital to financially sound small banks with less than $10 billion in assets, to encourage them to lend money to small businesses. As an incentive, banks increasing lending to small businesses by 10% or more over the previous year will pay as little as 1% on the capital they acquire from the fund.
The lending fund is a temporary fix, however. It will make investments in banks for one year. The tax breaks in the bill are worth about $12 billion, and are mostly good for a year or two.
State Small Business Credit Initiative. The State Small Business Credit Initiative is designed to help businesses in states that have successful small-business lending programs, and can show how a loan could help create jobs. States with such programs and facing budget cutbacks may be eligible for funding to continue them. The grant pool would total $2 billion, but states need to show that there has been at least $10 in new lending for every $1 in federal grant money they receive.
The tip of the iceberg
The $30 billion allocated for SBA loans and other financing programs may provide the capital needed by many small businesses to buy equipment. On the tax front, the enhanced small business tax incentives (see “Funding via Tax Breaks,” below) will benefit many businesses.
Funding via tax breaks
Among the tax provisions of the Jobs Act is an extension of the 50% “bonus” first-year depreciation. The bonus depreciation write-off, which expired at the end of 2009, is retroactive to Jan. 1, 2010. Bonus depreciation is not limited by the size of the business, but does have a very short window of opportunity. Qualified equipment must be purchased and placed into service before Dec. 31, 2010.
Generally, bonus depreciation is available for new property that is depreciable with a recovery period of 20 years or less. Off-the-shelf computer software depreciable over three years and qualified improvements to leased property also qualify. In addition to extending the “bonus” depreciation write-off, an increased Section 179 write-off will help reduce the out-of-pocket cost of new equipment and other purchases.
First year write-offs
The Section 179 expensing allowance, the first-year write-off for newly acquired equipment and business property, has been raised to $500,000 with an investment ceiling up to $2 million—at least for 2010 and 2011. Improvements made to leased business property are eligible for the more limited $250,000 Section 179 write-off.
That means a snow management business can write off the entire cost of acquiring property immediately, instead of depreciation de-ductions taken over time. For 2010 and 2011, this change to Section 179 expensing will permit snow and ice management businesses to write off as much as $500,000 in capital expenditures. Expenditures over that amount would phase out, but not completely, until the cost of eligible property exceeds $2.5 million.
Driving faster write-offs
Section 280F of the tax law limits depreciation deductions that can be claimed for cars and light trucks each year.
For passenger automobiles placed in service in 2010, the adjusted first-year write-off was limited to $3,060. For light trucks or vans, the adjusted first-year limit was $3,160. But that’s no longer the case. The limit on the amount of depreciation deductions allowed in the first year has been increased by $8,000 for qualifying automobiles that are not subject to bonus depreciation. Therefore, for 2010, the maximum first-year depreciation for passenger automobiles is $11,060, while for light trucks and SUVs, the maximum first-year write-off will be $11,160.
An extended life for the bonus depreciation write-off, extending and doubling the Section 179 first-year write-offs for newly acquired equipment and other business property, are a welcome boon in today’s economy. In fact, it just may contribute to reducing out-of-pocket equipment expenditures.
Mark Battersby is a freelance writer based in Ardmore, PA, focusing on business and finance.
