Barbara’s Blog

That’s the question that the Treasury answered in a recent report.  It “set the small business threshold at $10 million of income or deductions.”

The purported point of creating a definition is to enable policymakers to talk intelligently about the impact of taxes on “small business.” The actual impact of the definition may be more nefarious.

In the government’s endless question for more revenue, it may use the new definition as a way to increase taxes on certain businesses. More specifically, there has been talk of imposing the corporate tax on pass-through entities (e.g., S corporations, limited liability companies) that do not meet the small business definition (i.e., have income over $10 million). This could affect large law and accounting firms, medical practices, and other service-based businesses that have been set up in such a way as to avoid the double taxation of a C corporation.

Bottom line: I think it’s great to have a uniform definition of “small business.” Currently, there are more than two dozen different definitions of small business in the Tax Code. Some are based on income (revenue), some on assets, and some on the number of employees in the business. A uniform definition would certainly make life simple. But if a uniform definition results in higher taxes on businesses that choose to organize as pass-through entities, then I’m not happy with the results.

It’s about time that Washington recognized the importance of small business success to your economy. At last, the Federal Reserve and Treasury announced on November 25 the creation of a lending facility designed to provide liquidity to the small business community as well as to consumers.

The new facility, called the Term Asset-Based Securities Loan Facility (TALF), will lend up to $200 billion on highly-rated securities collateralized by SBA-backed loans, student loans and consumer car loans through December 31, 2009 (unless the program is extended). The Treasury (through its Troubled Assets Relief Program, or TARP) will provide $20 billion of credit protection to the Federal Reserve to support TALF.

This action is essential to provide liquidity to the small business sector. Since mid-September of this year, SBA loans under the 7(a) loan program are down by more than 50%. However, many resourceful small businesses during this period have been successful in finding funding through alternative sources–outside the SBA loan program.

It remains to be seen whether the new program will be effective or whether savvy small businesses will continue to find needed funding in alternative ways.