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The American Jobs Act: Tax Cuts to Help America’s Businesses Hire and Grow

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President Obama held a press conference today to continue his fight for Congress to pass the American Jobs Act. He explained what needs to happen to boost economic growth in the United States. One of the key proposals are tax cuts for small businesses. The president’s plan includes new tax cuts to businesses that provide immediate incentives for firms to hire and invest. These tax cuts would be available to all businesses, regardless of size, but are designed to target their impact towards the smallest businesses.

Key elements of his proposal are:

  • A payroll tax cut to businesses, with a focus on small employers ($65 billion in combination with the payroll tax holiday for new wages)
  • A complete payroll tax holiday for new jobs or wage increases
  • Extend 100 percent business expensing through 2012 ($5 billion)
  • Help entrepreneurs and small businesses access capital and grow

A payroll tax cut to businesses, with a focus on small employers ($65 billion in combination with the payroll tax holiday for new wages)

The president’s plan will extend the payroll tax cut to firms by cutting in half their payroll tax on the first $5 million in payroll. Next year, instead of paying 6.2 percent on their payroll expenses, firms would pay only 3.1 percent. The president’s plan would provide tax cuts for all firms, with focused relief on the 98 percent with less than $5 million in payroll.

How It Would Work for a Typical Firm: A construction firm with 50 workers earning an average of $50,000 a year–for a total payroll of $2.5 million–would receive a payroll tax cut of 3.1 percent of its total payroll, or about $80,000. The firm’s workers would receive an average tax cut of about $1,500 a year from the employee side payroll tax cut in the president’s plan.

A complete payroll tax holiday for new jobs or wage increases

In addition to the 3.1percent payroll tax cut for all firms, the president’s plan provides a direct incentive to encourage firms to hire additional employees or raise wages for their current employees. The plan would completely refund payroll taxes paid on added workers or wage increases for current workers above the level of last year’s payroll.  To focus the benefit of this tax cut on small businesses, payroll tax relief would be capped at applying to $50 million in new wages. This tax holiday would be augmented by targeted tax cuts for hiring the long-term unemployed as well as veterans who have been out of work six months or more.

How It Would Work for a Typical Firm: A warehouse with a payroll last year of $7 million that this year hires 40 new workers and adds $2 million in payroll would get a full refund on the 6.2 percent payroll taxes paid on the added $2 million in payroll–for a tax cut of $124,000. (That tax cut would come on top of the maximum 3.1 percent payroll tax reduction of $155,000 on its base payroll).

Extend 100 percent business expensing through 2012 ($5 billion)

The president is proposing an extension of the 100 percent expensing provision that he signed into law in December 2010, which rewards firms for making investments by allowing them to deduct the full value of those investments from their tax obligations through 2012. Extending 100 percent expensing for an additional year would put an additional $85 billion in the hands of businesses in 2012. Most of this relief would be recouped by the Treasury as businesses regain their strength. 

Help entrepreneurs and small businesses access capital and grow

The administration will soon announce a plan to accelerate government payments to small contractors to help put money in their hands faster. The president is also directing his CIO and CTO to stand-up, within 90 days, BusinessUSA, a one-stop online platform that businesses could use to access the full range of government programs and services businesses they need to compete globally. These changes were called for by the President’s Jobs Council, the President’s Export Council and small businesses across the country. Finally, the Administration supports a delay of the Bush administration-era rule requiring government entities withhold and send to the IRS 3percent of payments made to contractors.

Reducing Regulatory Burdens on Small Business Capital Formation: As part of the president’s Startup America initiative, the administration will pursue efforts to reduce the regulatory burdens on small business capital formation in ways that are consistent with investor protection. This includes working with the SEC to explore ways to address the costs that small and new firms face in complying with Sarbanes-Oxley disclosure and auditing requirements. The administration also supports establishing a “crowd funding” exemption from SEC registration requirements for firms raising less than $1 million (with individual investments limited to $10,000 or 10 percent of investors’ annual income) and raising the cap on “mini-offerings” (Regulation A) from $5 million to $50 million. This will make it easier for entrepreneurs to raise capital and create jobs.

Helping Small Businesses Compete for Infrastructure Projects: Small businesses are also a vital part of our efforts to invest in and rebuild our nation’s infrastructure.  In order to ensure that small firms have the tools they need to compete for and win bids on infrastructure projects, we are calling to temporarily increase the limit on SBA-guaranteed surety bonds from $2 million to $5 million.

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