Is a Small-Business Tax Cut Coming?

Now that the presidential election is over, what can small-business owners expect?

On one hand, they now have a president-elect who campaigned hard on several policy proposals that could have huge economic benefits for millions of small-business owners. Then again, they might have to wait a long time to see those proposals turned into policy and legislation.

Barack Obama made a number of campaign promises to appeal to the small-business vote. One of the most significant of those promises was a plan to waive the capital-gains tax for all start-up businesses. The capital-gains tax applies to both individuals and corporations and cuts into the profits you gain from noninventory assets such as stocks or real estate.

How much would this help small businesses?

The capital-gains tax hits small-business owners specifically the hardest when it comes to selling one's business. Up to 15 percent of the profit that a business's assets have accrued over more than a one-year period can be taxed when they are sold. Obama would raise this tax to 25 percent for people in the highest tax bracket. His proposal to waive the tax for start-ups is meant to relieve certain small-business owners of a greater burden.

But some disagree about how much relief Obama's proposal would bring. Carving out an exception for just start-up business owners—and not other small businesses—could be seen as a loophole in a system that already has many. "You want to make the tax code friendlier, but you don't want to make it more complicated," says Thomas Sullivan, who was chief counsel for advocacy at the Small Business Administration until October.

Having to worry about whether or not your business would meet the definition of a "start-up" can be taxing in itself. "You want businesses to focus on running their business. You don't want them to devote any brain cells to focusing on the tax code," says Tim Kane, an economist and a senior fellow at the Kauffman Foundation.

Still, at a time when investment in start-up businesses is seen as declining, waiving the capital-gains tax could provide a shot in the arm to stimulate more investors to take risks. "If you lower the rate, you are freeing up more cash into the economy," says Sullivan.

Will Obama follow through with it?

One complicating factor is that neither Obama nor his team has been completely clear on exactly what he would do with the capital-gains tax. In his speech at the Democratic National Convention, Obama said, "I will eliminate capital-gains taxes for the small businesses and the start-ups that will create the high-wage, high-tech jobs of tomorrow." But a version of his plan for small business available on his website reads that he would "eliminate all capital-gains taxes on investments made in small and start-up businesses [emphasis added]." He also has never made clear exactly how the plan would define a "start-up business."

That vagueness could be a sign of lack of priority. "The vagueness of a campaign is not something we should trust to be turned into policy," says Kane.

Obama's platform also had several other promises for small businesses, such as an increase in funding for the Small Business Administration and an annual $250 million investment in "public-private incubators" meant to spur entrepreneurial activity in disadvantaged communities.

Would it be a priority early on in an Obama administration?

The financial crisis and the debate over another stimulus package, the Detroit bailout, and foreign policy are all likely to eclipse small-business issues. "He's going to go right after the bailout. [Small-business] stuff is going to be on the back burner," says Nick Ragone, author of Presidents' Most Wanted. While many industries from life insurance to the automotive companies have been asking for a piece of the bailout money, it is harder for small businesses to get Washington's ear. Large businesses make the argument that the economy can't afford for them to go bankrupt. That does not come as easy for the large but disparate small-business sector, says Kane. "Small businesses are not allowed to say that sort of thing." Congress may also be loath to pass an effective capital-gains tax cut if a great deal of money is spent on stimulus and other projects, adds Kane.

Second, even after the big-ticket items take up political capital, Obama and congressional Democrats may choose to focus on other constituencies. In particular, many Democrats hope to pass the Employee Free Choice Act, a bill heavily favored by unions and labor advocacy groups, seen as a core Democratic constituency. "Small business historically has been more a Republican constituency. He will make good on his constituency before traditionally Republican constituencies," says Ragone.

But others are more optimistic. "The good news is that small business was absolutely a focal point of both campaigns," says Sullivan. Republicans would most likely support a capital-gains tax elimination for start-ups, making it a potential bipartisan issue. Because policies for small business were discussed so much in the campaign, they may have to at least be discussed early in the next administration. Otherwise, "why would Obama have focused so much on small business?" asks Sullivan.