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A Rural Microbusiness Tax Credit

This post was written by the Center for Rural Affairs.

Helping Rural Main Street Businesses Prosper
H.R. 2858 – Introduced by Representatives Ron Kind (D-WI) and Wally Herger (R-CA)

The Rural Microbusiness Investment Credit Act of 2011 (PDF of the bill) would help new enterprises start and existing enterprises grow by providing a 35 percent tax credit on up to about $30,000 of new investment. Owner-operated businesses with up to five employees and $1 million of revenue would be eligible if located in rural areas with significant population loss, low average incomes, high poverty or high unemployment. Beginning farmers and ranchers would also be eligible.

Three things about the bill make it more useful than traditional investment credits for many small businesses.

  1. The credit could be carried back to recapture taxes paid in the prior five years. That makes it more valuable to star-tup businesses and business hurt by the recession, which often don’t have the income to owe much in tax.
  2. The credit replaces depreciation and other deductions with a 35 percent tax credit, which comes directly off taxes owed. That gives the small business in the lowest tax bracket the same incentive to invest as the large corporation in the 35 percent tax bracket.
  3. The credit applies to a broader set of investments than equipment and plant. It covers increased investment in almost all aspects of the business, such as bigger inventories, new employees and increased advertising.

This credit is exactly what is needed for the rural economy. For many rural areas, micro-business creates most new jobs. And in hard times, micro-business is important in all of America. During the 2000-2003 recession, employment grew in Micro Enterprises 9.17 percent while falling 1.8 percent in larger firms. Micro Enterprise led America out of its last recession and can do so again with a little support.

Nevertheless, the small businesses on which much of rural America relies have long received short shrift in economic policy. Most job creation tax incentives are designed for much larger “small” businesses in high tax brackets, corporate America, and high-growth businesses seeking outside investors to inject capital for a stake in the business. This is the first tax credit designed for the micro-businesses that provide the economic backbone of much of rural America.

When Congress takes up the president’s call for job creation tax incentives, it should also take up the Rural Microbusiness Investment Credit. It would create jobs and genuine economic opportunity for the little guys in rural America. And with bipartisan support, rare in today’s Washington, Congress could actually pass it rather than just argue about it.