In an effort to stem a sharp decline in domestic economic activity that began in late 2007, Congress passed and President Obama signed in February 2009 an economic stimulus bill known as the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5 ). The measure contains a variety of tax cuts, loans and loan guarantees, and spending initiatives, whose estimated 10-year cost comes to $787 billion. Most of the cost of the tax provisions is due to tax benefits for individuals, as the 10-year cost of the business tax incentives in the act totals only $6.2 billion, or about 2% of the aggregate cost of the tax cuts. This report identifies the tax provisions in ARRA that have the potential to benefit a large number of small firms in a broad range of industries and discusses how each provision is likely to affect small firms as a whole in the next year or two. It will not be updated. What Is a Small Firm? An important and problematic issue in assessing how small firms are likely to be affected by the business tax provisions in ARRA is the definition of a small firm. No standard or uniform definition undergirds the federal laws and regulations aimed at providing assistance to small business. Instead, several criteria are used to identify eligible firms. Tax Provisions in ARRA That Could Benefit Many Small Firms in a Wide Range of Industries

A review of the business tax provisions included in ARRA suggests that 11 of them have the potential to benefit a large number of small firms in a broad range of industries:
Extension of the bonus depreciation allowance Extension of enhanced expensing allowance Extended net operating loss carryback period Expanded work opportunity credit Deferral of income from discharge of business debt Increased exclusion of gain on the sale of small business stock Reduction in recognition period for built-in gains tax Extension of option to monetize a portion of unused pre-2006 research and corporate alternative minimum tax (AMT) credits Lower estimated tax payments in 2009 for qualified small business owners Credit against employment tax payments for employer COBRA subsidies Increase in the exemption amounts for the AMT and an extension through 2009 of the full use of non-refundable personal credits against the tax
Five of them are targeted at small firms: (1) extension of the enhanced expensing allowance through 2009; (2) extended net operating loss carryback period for losses incurred in 2008; (3) temporary increase in the exclusion of gain on the sale of small business stock; (4) temporary reduction of the recognition period for the built-in gains tax for S corporations; and (5) lower estimated tax payments for certain small business owners in 2009. The six other tax provisions could offer significant benefits to small as well as large firms. Excluded from the list are tax provisions in ARRA that target specific sectors (e.g., the credit for production of electricity from renewable sources), and that encourage investors to purchase government bonds (e.g., credit for recovery zone bonds) or buy equity in entities that invest in low-income and economically distressed communities (e.g., new markets tax credit). On the whole, the provisions seem intended to spur greater investment and hiring in 2009 (and to a lesser extent in 2010) by small firms than otherwise would be the case. ARRA tries to accomplish this mainly by temporarily lowering the cost of capital for purchases of certain tangible assets, increasing the cash flow of many small firms, and reducing the after-tax cost of hiring certain individuals. But available evidence suggests that the unanticipated and extraordinary severity of the current economic downturn, as manifested in part by sharp declines in business profits, domestic employment, and gross domestic product (GDP) since early 2008, is outweighing the stimulus imparted by these tax benefits. ARRA extends the option of claiming the refundable tax credit in lieu of a bonus depreciation allowance through 2009.
In a bid to arrest a sharp downturn in the U.S. economy that is thought to have begun in late 2007, Congress passed and President Obama signed in February 2009 a bill to stimulate the economy known as the American Recovery and Reinvestment Act of 2009 (ARRA, P.L. 111-5). Among its many provisions, the act contains a variety of tax cuts and spending initiatives, whose estimated 10-year cost comes to $787 billion. The tax provisions account for 36% of that amount, or $285.6 billion. Most of this cost is due to tax benefits for individuals, as the 10-year cost of the business tax provisions totals $6.2 billion, or about 2% of the total cost of the tax incentives.
This report identifies the tax provisions in ARRA that have a significant potential to benefit a large number of small firms in a wide range of industries. It also explains the intended purpose of each provision and discusses how it might affect the performance of small firms in the next year or two. It will not be updated.
An important and problematic issue in determining how most small firms are likely to be affected by the business tax provisions in ARRA is the definition of a small firm. No standard or uniform definition undergirds the federal laws and regulations that provide assistance to small business. Instead, a variety of standards (e.g., employment or asset size) is used to identify eligible firms. In collecting and releasing economic data on small business, the Small Business Administration defines a small firm as any firm with 500 or fewer employees in a recent year. A similar definition implicitly guides the analysis presented here.
A review of the business tax provisions included in ARRA suggests that 11 of them have the potential to benefit a large number of small firms in a broad range of industries. They include one-year extensions of the bonus depreciation allowance, the enhanced expensing allowance, and the option to claim a refundable tax credit in lieu of the bonus depreciation allowance for unused research and alternative minimum tax credits from tax years starting before 2006.
Five of the provisions are targeted at small firms: (1) extension of the enhanced expensing allowance through 2009; (2) extended net operating loss carryback period for losses incurred in 2008; (3) temporary increase in the exclusion of gain on the sale of small business stock; (4) temporary reduction of the recognition period for the built-in gains tax for S corporations; and (5) lower estimated tax payments for certain small business owners in 2009. The six other tax provisions could offer significant benefits to many small as well as large firms.
Excluded from the list are tax provisions in ARRA that target specific sectors (e.g., the credit for production of electricity from renewable sources), and that encourage investors to purchase government bonds (e.g., credit for recovery zone bonds) or buy equity in entities that invest in low-income and economically distressed communities (e.g., new markets tax credit).
On the whole, the provisions seem intended to spur greater investment and hiring in 2009 (and to a lesser extent in 2010) by small firms than otherwise would be the case. They try to accomplish this mainly by temporarily lowering the cost of capital for purchases of certain tangible assets, increasing the cash flow of many small firms, and reducing the after-tax cost of hiring certain individuals. But available evidence suggests that the unanticipated and extraordinary severity of the current economic downturn, as manifested in part by sharp declines in business profits, domestic employment, and gross domestic product (GDP) since early 2008, is outweighing the stimulus imparted by these tax benefits.