Exploring Microenterprise Tax Incentives Guest Blogger Gene Severens

Last week AEO sent a link to a recent article posted on Forbes.com, which discusses the small business tax incentives (or lack there of) in President Obama’s stimulus proposal. We invited AEO members and friends to share their thoughts and Gene Severens of CFED shared the following. AEO invites you to continue the conversation and include your own comments – click on “comments” below to see what others are saying or to add a comment yourself.



Thanks for the invitation to inform AEO membership about how tax incentives impact our microenterprise customers, and thanks for circulating the link to the Forbes article – it was quite provocative. Microenterprise tax policy and practices are important and largely unexplored issues, and the Forbes article demonstrates how misleading the subject can get.

By way of background, I direct CFED’s Self-Employment Tax Initiative (SETI), which was launched in 2005. SETI explores: (1) how the tax code could be used to develop new policies that would support start up microenterprises; and (2) how tax preparation and the “tax season” can be used as an annual marketing opportunity to deliver financial products to a wider range of microenterprises. For the current tax season, SETI is working with 16 local programs (through $10-25,000 subgrants) that will provide tax preparation to approximately 7,500 microenterprises by April 15, 2009.

The Forbes article, like many articles assessing small business tax reform, only tells half the story - the corporate side (including Subchapter S) of small business taxation. But because most microbusinesses are started, by default, as self-employed “sole proprietors” not corporations, they are taxed through individual tax laws. As a result, to understand the impact of tax policies on micro and early-stage small businesses, the microenterprise development field needs to focus on individual tax laws and its “Schedule C” tax form used to calculate self-employment net profit.

The Forbes article complains that the stimulus bill does not consider small business tax credits like “a zero rate on capital gains from investments in new small businesses” or “payroll tax holiday for employers.” No doubt these particular tax credits could be useful to some small businesses, but they are, for the most part, irrelevant to most microbusinesses - especially start ups during their first few years of business and businesses that start with no employees.

What the Forbes article does not mention at all – the missing “other half” of the story – is any mention of the stimulus package’s “Making Work Pay” tax credit ($1000 if filing jointly, $500 single). While our analysis is just beginning and could change, we believe that the “Making Work Pay” tax credit applies to microenterprises and provides an important new kind of opportunity to AEO members to reach more customers with new tax code-based financial products.

By our first calculation, the “Making Work Pay” tax credit would allow approximately 10.8 million self-employed households with net profits from microbusiness to claim either a $500 or $1000 tax credit. While this credit can also be claimed using wage income, for those households whose income is substantially derived from microbusiness income, “Making Work Pay” will function like a “microenterprise tax credit.”

In the deepening recession and spurred both by struggling low-income households as well as talented, laid-off workers, we expect that “self-help jobs” will become increasing important, making this credit all the more significant as a counter-cyclical stimulus. For lower-income households, which run “informal” businesses that do not report self-employment income, the “Making Work Pay” tax credit can combine with the EITC to provide a $5000+ refundable tax bonus to formalize their business.

This is not a small program. By our initial calculation, the value of the new tax credit for self-employed households is something like $8 billion. That’s “billion” with a “b,” making this tax credit one of the largest federal “microenterprise” programs ever.

We have much to learn about how the tax code impacts microbusinesses and would invite comments from AEO members. Because of the peculiarities of microenterprise tax policies, many new microenterprises will not realize their eligibility for this tax credit until next year’s tax season (Jan - April 2010). As a result, I can imagine a big role for AEO and its members to educate the 10 million households about this important help. SETI staff will continue to refine our understanding of the microenterprise tax policies in general and the Obama stimulus package, in particular, and post our work at www.cfed.org/go/seti. Comments and criticism can be sent to us at seti@cfed.org or feel free to email me directly at eseverens@cfed.org.

Thanks.
Gene Severens


Eugene Severens founded the Rural Enterprise Assistance Project (REAP), a microlending and training program serving rural Nebraska in 1989. He went on to start the Nebraska Microenterprise Partnership Fund, a successful statewide microenterprise intermediary and CDFI which supports microenterprise programs in Nebraska. He is currently Director of CFED's National Fund for Enterprise Development, where he works on the State Microenterprise Systems project and directs CFED's Self-employment Tax Initiative (SETI), a project which explores how the tax code is and potentially could be used as an important new direct delivery systems for microbusinesses. SETI recently (Fall 2006) disbursed a series of mini-grants to work with community tax preparation and microenterprise programs to explore the potential of tax preparation and planning as an important new product for the field. Gene was also a member of the very first AEO Board of Directors.