The American Recovery and Reinvestment Act and Small Business

The economic stimulus package (Recovery and Reinvestment Act) included tax, loan, and investment provisions for businesses.

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The American Recovery and Reinvestment Act of 2009 (commonly called the "stimulus package") was signed into law by President Obama on February 17, 2009. The stimulus package contains several provisions aimed at helping small businesses, including certain tax cuts and Small Business Administration (SBA) loan provisions.

Stimulus Package Tax Provisions

Section 179 expensing. Section 179 of the Internal Revenue Code allows you to deduct a certain amount of new equipment or other assets in the first year they are owned, subject to a phase-out if you place a large amount of equipment in service in a year. Most depreciable business assets (like machinery, vehicles, and computers) qualify for the Section 179 deduction, though real estate, inventory bought for resale, and property bought from a close relative do not.

Higher limits for the Section 179 deduction ($250,000) and a higher phase-out ($800,000) were enacted as a temporary one-year measure, for 2008, under the Economic Stimulus Act of 2008. To encourage capital expenditures, the Recovery Act of 2009 extends the $250,000 deduction limit and the phaseout threshold of $800,000 for one more year.

Bonus depreciation. The Economic Stimulus Act of 2008 also put in place a one-year-only bonus depreciation for property placed in service in 2008.This special deduction allows taxpayers to depreciate 50% of the cost of new equipment or other assets during the first year the property is placed in service. The stimulus package extends 50% first-year bonus depreciation through 2009.

Carryback of net operating losses (NOLs). Under the stimulus package, eligible small businesses with net operating losses in 2008 can carry those losses back for the prior five years. This is instead of the current two-year carryback period for net operating losses. This will effectively give businesses a rebate on taxes paid in prior, profitable years. Businesses with gross receipts of $15 million or more cannot take advantage of this provision.

Reduced estimated tax payments. Small business owners often pay estimated taxes based on 100-110%% of their prior year's taxes. The stimulus package lowers the amount of estimated taxes due to 90% of the previous year's taxes.

Work opportunity tax credit. To encourage hiring, the stimulus package creates two new categories of eligible workers for the work opportunity tax credit -- disconnected youth and unemployed veterans. Unemployed veterans are defined as military personnel who have been discharged or released from active duty during the five-year period before being hired and who have received unemployment compensation for four or more weeks during the one-year period before being hired. A "disconnected youth" is defined as someone between the ages of 16 and 25 who is not regularly attending school or employed during the six-month period before being hired, and is not "readily employable by reason of lacking a sufficient number of basic skills." Businesses who hire these workers in 2009 and 2010 may be able to take advantage of this tax credit.

Stimulus Package Loan and Investment Provisions

Increase in SBA loan guarantees. To stimulate lending, the Recovery Act allows the Small Business Administration to raise its loan guarantees to up to 90% for loans under its 7(a) loan program. Currently, the maximum guarantees allowed are 85% for loans of up to $150,000 and 75% for larger loans. The 7(a) loan program provides government guarantees for loans made to certain eligible small business borrowers who can't get credit elsewhere. The higher loan guarantees are in effect until the end of 2009, or until the funds are exhausted.

Elimination of SBA loan fees. The stimulus package also eliminates the up-front fee on SBA 7(a) loans that lenders pass on to borrowers. In addition, it eliminates the fees charged borrowers and lenders on 504 Certified Development Company loans. The 504 loans are long-term, fixed-rate loans for small businesses that need to purchase major fixed assets, such as land, buildings, machinery, and equipment. The fees on both these types of loans are eliminated until the end of 2009, or until available funds under the loan programs are exhausted.

New loan program for existing debt. The stimulus package creates a new SBA loan program that provides loans of up to $35,000 for small businesses who need to make payments on existing loans. It is a deferred payment loan, and no repayment is due until 12 months after the loan has been fully disbursed.

Expansion of SBA's microloan program. The stimulus package provides increased funding to expand SBA's microloan program. This program provides small loans of up to $35,000 to small businesses.

More surety bond coverage. The stimulus package expands SBA's surety bond program by raising the maximum contract amount that can be covered by an SBA surety bond from $2 million to $5 million (and sometimes higher). SBA surety bonds help small businesses bid on contracts that they might not otherwise get.

Investor incentive provisions. The stimulus package includes a provision that excludes from taxation 75% of any capital gains an investor earns on small business investments that are held for five years.

For More Information

For a clear explanation of the practical and legal information you need to run your small business, get Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo), which provides the latest regulations, tax numbers and business realities in a changing economy.

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