Newport Board Group, an Advisory Firm of CEOs Serving the Middle Market, Predicts What a Republican Congress Will Mean to Small Business

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With Control of the Legislative Branch, Will Republicans Drive Business Growth?

For small and growing businesses, the job creation engines of the U.S. economy, more relief is in sight but don’t expect dramatic changes from our new Congress.

Just a few hours after the mid-term election results were in and the Republican Party took control of both the House of Representatives and the Senate for the first time since 2006, the stock market, which some predicted to skyrocket after a Republican victory, was up less than a half of a percent.

One school of thought was that the Republican victory was already factored into the stock market and this may well be the case as there has been a significant market recovery over the last three weeks from the October stock market drop.

The other school of thought is that despite the significant differences between the parties on virtually every issue, when it came to the economic recovery and jobs growth, the policies of the parties were significantly aligned. Case in point:

  • Interest Rates – low interest rates are good for business. Borrowing at a low cost stimulates consumer spending, corporate purchases, capital expenditures and economic production. Credit availability is significant today and banks are bemoaning that they can’t lend money to business fast enough. Generally a Republican issue, low interest rates were driven under a Democratic administration.
  • Tax Incentives – The old mantra “The Democrats want to raise taxes for business and the Republicans want to lower taxes” is no longer true - one of the largest incentives, the first year deduction for capital purchases (IRC Section 179) has been expanded under a Democratic administration. Recently, Senate Majority Leader Democrat Harry Reid has proposed extending the higher Section 179 deduction, along with extending 54 other deductions that expired at the end of last year. Conversely, Republican Sen. Orrin Hatch told Bloomberg News (May 16, 2014) that each tax break must be reviewed on a case-by-case basis.
  • Red Tape and Regulations – Business, particularly small business, complain about the mounting government regulations, red tape and barriers to doing business. Few can dispute that mounting regulations have made it more difficult to grow a business. But effective January 3, 2013, The Small Business Act was created, in part, to help small businesses compete in the economic market.

So despite the gridlock in Congress, policies supported by both parties were implemented to support the growth of business. But what’s ahead for small businesses with a Republican legislative branch and a Democratic executive office?

With control of the Senate and the House of Representatives, the Republicans can hold hearings and encourage bipartisan dialogue about key issues facing the U.S. economy and world issues. The President has veto power but in the long run, there should be little impact on corporate earnings and the economy as a result of the mid-term elections.

Key Republican Small Business Legislation

First on the agenda will be legislation ensuring the continued recovery of the U.S. economy and increased job growth. Despite the addition of 230,000 new jobs last month and the reduction of unemployment from 10% in 2009 to 5.9% today; the Republicans will promote legislation to drive unemployment below 5%. Key bills will include:

1.    Jobs for America Act – Designed to exempt small business from costs of the Affordable Care Act (ACA), this bill redefines "full-time employee," for purposes of the mandate requiring employers to provide health care coverage for their employees, as an employee who is employed on average at least 40 hours of service a week (currently, at least 30 hours of service a week).
2.    Hire More Heroes Act – Another ACA amendment, this Act permits an employer, for purposes of determining whether such employer is an applicable large employer and thus required to provide health care coverage to its employees under ACA, to exclude employees who have coverage under a health care program administered by the Department of Defense (DOD) or the Department of Veterans Affairs (VA).
3.    American Research and Competitiveness – American Research and Competitiveness Act of 2014 – Establishes a 20% tax rate for research credit and makes the credit permanent.
4.    America's Small Business Tax Relief – Allows first year expensing for depreciable business property, to make permanent: (1) the increased $500,000 expensing allowance (2) the increased $2,000,000 threshold amount for such property over which the amount of the expensing allowance is reduced, (3) expensing of computer software, and (4) rules for the expensing of qualified real property (i.e., leasehold improvement, restaurant, and retail improvement property). Makes air conditioning and heating units eligible for the expensing allowance.
5.    S Corporation Permanent Tax Relief – Makes permanent several tax reduction changes available to S corporations, a predominant form of business entity used by smaller companies.
6.    Bonus Depreciation Modified and Made Permanent - make permanent the additional 50% depreciation allowance.
7.    Regulatory Flexibility Improvements Act – Requires initial and final regulatory flexibility analyses to describe alternatives to a proposed government rule to minimize any adverse significant economic impact or maximize the beneficial significant economic impact on small entities.

Although many of these bills will have an impact on creating jobs, reducing business costs and red tape, none are likely to create a dramatic growth in new jobs or economic growth. Most are likely to be supported by the President and Congress, both Republicans and Democrats.

For small and growing businesses, the job creation engines of the U.S. economy, more relief is in sight but don’t expect dramatic changes from our new Congress.

Michael Evans is the National Managing Director of the Newport Board Group, a firm of experienced CEOs serving middle market companies.

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