Small Business Provisions Included in Extenders Legislation

Legislation has been voted out of the Senate Finance Committee that would extend a number of popular tax provisions, including small business expensing, 100 percent exclusion on gain of small business stock, and the research and experimentation (R&E) tax credit.  The small business expensing provision would allow small businesses to immediately expense many asset purchases on their current-year tax return, as opposed to depreciating the purchase over a period of years.  This accelerates future tax benefits to the current year.  Exclusion of gain on small business stock would allow investors to exclude 100 percent of capital gain from qualifying small business stock, thus encouraging investment in startup companies.  The R&E tax credit is an important incentive for companies that create new products and processes that drive technological advancement.

Small Business Expensing.  The Senate proposal would raise the small business expensing limitation to $500,000 for 2012 and 2013, with a phase-out once purchases exceed $2 million.  The current limitation is set at $125,000, with a $500,000 phase-out.  Without legislative action, the 2013 limitation will drop to $25,000 with a $200,000 phase-out.

This small business expensing provision has provided a much-needed boost to capital investment by small businesses during the economic downturn.  This provides a double benefit for many CompTIA members, allowing them to purchase products, while incentivizing other small businesses to purchase technology solutions.  This is an important incentive that will allow small businesses to continue to lead the country in its economic recovery.

Exclusion of Gain on Small Business Stock.  The legislation would extend the exclusion of 100 percent of gain from the sale of certain small business stock.  Qualifying stock must have been acquired at original issue and held for at least five years.  This proposal is generally effective for stock acquired after December 31, 2011.  We believe this provision encourages investment in startup companies, and is an important incentive to fuel our continuing economic recovery.

R&E Tax Credit Extended.  This legislation also would extend the R&E tax credit through 2013.  For general research expenditures, the allowable credit is equal to 20 percent of the amount that a company’s qualified research expenses for a taxable year exceed its base amount for that year.  This means that the credit applies only to incremental increases in qualified research.  An alternative simplified research credit of 14 percent can be claimed in lieu of the basic credit.  The R&E credit has been a valuable incentive to companies that drive technological development, which is vital to our CompTIA members.  This two-year extension is a good step; however, we believe that this credit should be made a permanent part of the code.

R&E Credit Benefits Should be Extended to Startups.  And, while we support the extension of this traditional R&E tax credit, we believe that more should be done to support and encourage research by small startup companies.  Most small startup companies do not show a profit, and thus do not have an income tax liability against which to offset the traditional R&E tax credit.  Thus, some of the most vital and innovative companies do not receive any benefit from the credit.  We believe more must be done to assist the most innovative and nimble companies that are contributing to our technological growth.  Therefore, we call on the Senate to include a proposed amendment – “Startup Innovation Credit Act of 2012” – that will allow small startup innovators to take advantage of this credit.

The "Startup Innovation Credit Act of 2012" – recently introduced by Senators Chris Coons (D-Del.) and Mike Enzi (R-Wyo.) – would allow small businesses to apply unused R&E tax credit against payroll tax liability.  This means that even if the company were operating at a loss for the first few years, it would still be able to receive the economic benefit of the R&E credit by offsetting this credit against employee payroll tax liability. This payroll tax offset is limited to $250,000 annually.  We believe this is am important correction of the existing R&E credit, which does not provide current economic benefits to many startup companies.  We need to encourage innovation in order to maintain our competitive advantage in the world economy.  Incentizing our many small businesses is the right step.

Outlook.  It remains unclear as to whether this extenders legislation can gain bi-partisan support for passage before the end of the year.  In any event, further action on this legislation by the full Senate is anticipated when Senators reconvene sometime in September.  Efforts in the House to package a similar extenders bill failed.