The Senate has introduced a bill aimed at helping small businesses access credit and capital and create jobs.

Senate Finance Committee Chairman Max Baucus, D-Mont., and Senate Committee on Small Business and Entrepreneurship Chair Mary Landrieu, D-La., introduced the Small Business Jobs Act on Tuesday. The bill also contains provisions from Sen. Olympia Snowe, R-Maine, the ranking Republican member of Landrieu’s committee.

The House passed a similar bill earlier this month (see House Passes Small Business Tax Relief Bill).

The legislation would encourage investment in small businesses by allowing investors to exclude 100 percent of the gains from the sale of certain small business stock from their income for tax purposes if the stock is held for more than five years. This policy would help small business owners access more private capital to finance an expansion and hire new workers.

The bill would also reduce the tax burden for small businesses by allowing them to carry back general business tax credits to offset their tax burdens from the previous five years. Small businesses would also be able to count the general business credits against the Alternative Minimum Tax, freeing up capital for expansion and job growth. 

The legislation would allow small business taxpayers to write off more of the cost of purchases for their businesses, such as equipment and machinery, in the year the purchase is made. The legislation also would expand the types of purchases that would qualify for special expensing to include some types of real property, such as leasehold, retail and restaurant improvements.

In addition, the bill would promote tax fairness by preventing small businesses from incurring large tax penalties aimed at large corporations and wealthy individuals investing in tax shelters.

"The Act modifies the penalties for small businesses that unknowingly invest in something that the IRS considers to be a tax shelter," said Baucus. "Businesses can be subject to penalties of up to $300,000 for investing in a tax shelter. A penalty that large can severely jeopardize the success of a small business. Our bill would limit the penalty in relation to the size of the investment."

The legislation would double the amount of start-up expenditures that may be deducted by someone starting a small business. It would also allow self-employed individuals to deduct health insurance costs for purposes of paying the self-employment tax.

“Small businesses are the engine of our economy and need to be a critical focus of our job-creation efforts,” said Baucus in a statement. “Helping small businesses helps get Americans back to work. Working together, we crafted our bill to promote entrepreneurship and investment in small businesses and provide small businesses with the vital access to capital they need to create jobs.”

In addition, the legislation would establish a Small Business Lending Fund of $30 billion to provide capital investments to small community banks to increase small business lending. The fund would be limited to only the smallest banks, those that hold less than $10 billion in assets, and the performance-based program would incentivize only those lenders that extend new credit by decreasing the dividend rate banks pay as they increase lending.

The legislation would also establish a State Small Business Credit Initiative to provide $900 million in grants to existing successful state small business programs that help private lenders extend more credit to small businesses.

In addition, the legislation would raise the cap on small business loans to increase lending by $5 billion in the first year after enactment, and refinance commercial real estate debt into long-term, fixed-rate loans, provisions that are expected to be budget neutral and could create or save 200,000 jobs.

The bill would build on initiatives put in place through the Recovery Act, by making changes to the SBA’s two largest lending programs and to its microloan program to pump more into small businesses. The legislation calls for an extension of these lending provisions through Dec. 31, 2010.

“By providing some cost-effective and commonsense changes to lending, contracting and technical assistance programs, we can build on successful programs implemented in the Recovery Act to help small businesses keep their doors open,” said Landrieu in a statement.  “Ranking member Snowe and I have crafted this package to include provisions that we have both advocated for, and I am very pleased with the finished product.  As we finalize our package, I look forward to working with my colleagues on both sides of the aisle, as well as the other committees, to ensure the swift passage of this legislation.”

The legislation would authorize increased resources to support the Office of the United States Trade Representative’s small business export promotion and trade enforcement activities. In addition, the legislation would improves the Small Business Administration’s trade and export finance programs, elevate the Office of International Trade within the SBA, and adds export finance specialists to the SBA’s counseling programs.

The legislation would establish a State Export Promotion Grant Program, which would increase the number of small businesses that export. It would also allow the SBA to waive or reduce the state-matching share of its funding requirement for up to one year to continue providing technical assistance to underserved communities to start and grow small businesses.

The legislation also would remove the red tape and closes loopholes that often put government work into the hands of multinational corporations, instead of Main Street businesses. The legislation would make clear that no single contracting program receive priority over another program when competing for federal contracts.

The legislation would be fully paid for by closing some tax loopholes. One of the revenue-raising offsets is a provision that would require people receiving rental income from real property to file information returns to the IRS and to service providers reporting payments of $600 or more during the year for rental property expenses.  In general, there is an exception for individuals renting their principal residences, including active members of the military, from the reporting requirements.

Another revenue-raising provision would increase the penalties for failure to timely file information returns to the IRS.  The first-tier penalty would increase from $15 to $30, and the calendar year maximum would increase from $75,000 to $250,000. The second-tier penalty would increase from $30 to $60, and the calendar year maximum would increase from $150,000 to $500,000.

The third-tier penalty would increase from $50 to $100, and the calendar year maximum would increase from $250,000 to $1.5 million. For small filers, the calendar year maximum would increase from $25,000 to $75,000 for the first-tier penalty, from $50,000 to $200,000 for the second-tier penalty, and from $100,000 to $500,000 for the third-tier penalty. The minimum penalty for each failure due to intentional disregard would increase from $100 to $250. The penalty amounts are adjusted every five years for inflation.  Penalties for failure to file information returns to payees are similarly increased. 

In addition, the bill would clarify that Treasury’s continuous levy authority on government payments to federal contractors who owe back taxes to the IRS would apply to amounts paid for property, as well as to payments for goods and services.

Another revenue-raising provision would apply a continuous levy to tax the liabilities of certain federal contractors. Generally, before the IRS can issue a levy for an unpaid federal tax liability, it must give the taxpayer an opportunity for a collection due process hearing. Prior to the federal government making disbursements to federal contractors, an automated check for a federal tax liability occurs. When such a liability is identified, the IRS issues a CDP notice to the contractor but cannot levy on payments to the contractor until the CDP requirements are complete. The bill would allow the IRS to issue levies prior to a CDP hearing on federal tax liabilities of federal contractors. It also would provide the taxpayer with an opportunity for a CDP hearing within a reasonable time after a levy is issued.

Another provision would expand the penalty for submitting a bad check to the IRS for payments made through any commercially acceptable means, including electronic payments. 

Other revenue-raising offsets also aim to increase flexibility in retirement preparation, One would allow participants in governmental 457 plans to treat elective deferrals as Roth contributions.  Beginning in 2011, the bill would allow retirement savings plans sponsored by state and local governments (governmental 457(b) plans) to include Roth accounts, which are currently available only in 401(k) and 403(b) plans and will be available in the federal Thrift Savings Plan in 2011. Contributions to Roth accounts are made on an after-tax basis, but distributions of both principal and earnings are generally tax-free. 

Another provision would allow rollovers from elective deferral plans to Roth designated accounts.  The bill would allow 401(k), 403(b), and governmental 457(b) plans to permit participants to roll their pre-tax account balances into a Roth account.  The amount of the rollover would be includible in taxable income except to the extent it is the return of after-tax contributions.  If the rollover is made in 2010, the participant can elect to pay the tax in 2011 and 2012. Plans would be able to allow these rollovers immediately upon enactment.

Another revenue-raising offset would close a tax loophole, making crude tall oil, a waste byproduct of the paper-manufacturing process, ineligible for the Cellulosic Biofuel Producer Credit.  The bill would limit eligibility for the tax credit to fuels that are not highly corrosive, and could be used in a car engine or in a home-heating application.

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