President Barack Obama and Treasury Secretary Timothy Geithner unveiled a new effort aimed at unlocking the tight credit market for small businesses.

“Small businesses don’t just provide jobs, they provide the innovations that help us lead in the global economy,” said Obama.

The five-point plan includes purchasing up to $15 billion in securities backed by loans from the Small Business Administration’s 7(a) program, which is the SBA’s largest loan program for small business, as well as loans from the SBA’s 504 Community Development Loan Program. These efforts are also aimed at unfreezing the secondary market for small-business lending.

“Across this country, tens of thousands of small business owners are finding it harder to get the credit necessary to stay in business,” said Geithner. “Credit is essential to economic recovery, and we need our nation’s banks to go the extra mile in keeping credit lines in place on reasonable terms for viable businesses.”

The Treasury also said that it would temporarily raise guarantees to up to 90 percent in the 7(a) loan program. During the recession, the current guarantees of up to 85 percent for loans at or below $150,000 and up to 75 percent for larger loans have not been large enough to give banks the confidence they need to lend.

In addition, the Treasury will temporarily eliminate certain SBA loan fees to reduce the cost of capital, including the Certified Development Company processing fees charged to borrowers, and third-party participation fees charged to lenders.

Geithner has also called for new reporting requirements on bank lending to small businesses, requiring the 21 largest banks receiving assistance from the Treasury’s Financial Stability Plan to report their small-business lending every month. Every bank nationwide will also need to report their total lending to small businesses in their regular quarterly reports, rather than just once a year.

The Internal Revenue Service is also issuing new guidance for an expanded carryback provision that is already part of the American Recovery and Reinvestment Act’s tax cut package for small businesses.

“Today, the IRS will announce that small businesses will now be able to carry back their operating losses five, instead of the usual two, years in order to increase your cash flow as we come out of this period, and thus allow you to invest more in your operations,” said Geithner.

Obama noted that the recovery bill included some provisions to help small businesses, and that his recently proposed budget will expand and make permanent some of the tax cuts in the recovery plan, as well as help small businesses offer health coverage to their workers. “We have done a lot, but we have to do more,” he said.

To accommodate the change for carrybacks in tax law, the IRS has updated the instructions for two key forms – Forms 1045 and 1139 – that small businesses can use to make use of the special carryback provision for tax year 2008.  These forms are used to accelerate the payment of refunds. 

The new provision enables small businesses with a net operating loss in 2008 to elect to offset this loss against income earned in up to five prior years. Typically, an NOL can be carried back for only two years. The IRS has released legal guidance in Revenue Procedure 2009-19 outlining specific details.  Some taxpayers must make the election to use this special carryback by April 17, 2009.

“The new net operating loss provisions could throw a lifeline to struggling businesses, providing them with a quick infusion of cash,” said IRS Commissioner Doug Shulman. “We want to make it as easy as possible for small businesses to take advantage of these key tax benefits.”

The normal two-year carryback remains available if the small business does not elect the special carryback provision. If the loss exceeds the income for the carryback period, the taxpayer can continue to carry forward the remaining balance of the NOL for up to 20 years. For small businesses that use a fiscal year, this special carryback may be used for an NOL in either a tax year that ends in 2008 or a tax year that begins in 2008. Once a taxpayer makes this election, it may not be changed.

To qualify for the new five-year carryback provision, a small business must have no greater than an average of $15 million in gross receipts over a three-year period ending with the tax year of the NOL.  Businesses with more than $15 million in gross receipts still qualify to carry back their 2008 NOL for two years.

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