House Bill Offers Tax Relief To Small Businesses

Politics

from the gimme-a-break dept

Continuing gov’t efforts to try to boost the economy are creating some additional tax breaks for entrepreneurs and small businesses. Just last week, the Small Business and Infrastructure Jobs Tax Act passed in the House and is now on its way to the Senate — though the progress of the bill will be held up until after the Easter break in Congress. But so far, this $14 billion piece of legislation (aka H R 4849) aims to help small companies with a few tax exemptions and deductions (as well as a bunch of other provisions). Here are some highlights:

100% exclusion for capital gains on qualifying small business stock acquired after Mar. 15, 2010 and before Jan. 1, 2011.

New limits to the penalty for failing to disclose certain reportable transactions. (avoid the Code Sec. 6707A penalty, folks!)

Higher tax deductions allowed for business start-up expenditures — increased from $5,000 to $20,000. At the same time, the threshold amount for reducing the limit will be increased from $50,000 to $75,000.

The Senate is also expected to try to increase the exports from small businesses with incentives and to improve loan availability from the Small Business Administration. But we’ll have to wait a bit to see what the actual law will be when it’s passed.

Filed Under: bill, congress, sba, small business, taxes

Wealth Is Defined By More Than Just Money

Ramblings

from the a-bad-economist's-problem dept

One of the hallmarks of a bad economist is when they define things in terms of actual money, rather than marginal benefit or marginal utility. You hear it every so often, where people claim that the “rational person” will always take a higher paying job or will always “want something for free,” when the reality is quite different. Economics really looks at marginal benefit or marginal utility, and even though it’s often defined in monetary terms, that doesn’t mean that it just counts actual money. After all, money is just one way of measuring and/or transferring value. That’s why it’s always interesting to see stories that demonstrate the difference between marginal benefit and direct money, such as this post by Peter Friedman, which highlights the situation where law firms — that asked law students they hired to take a temporary “fun” job to wait out the recession (while having the law firm pay part of their salary) before joining the law firm for their “real” job — are discovering many of those students are no longer interested in law firm jobs:

But as newly barred lawyers have taken this public interest option, many have found jobs they like and enjoy. They picked up some ethical sense in school and enjoy doing work that connects with their values. They sympathize with their classmates who ended up at firms and are working long hours doing work they dislike, but they don’t want their jobs. They calculate how much they are making per hour, and find that they are better paid — at least at first — than those at firms.

Law firms wanted a reserve workforce committed to them to be on call and ready to go should the market pick back up. What they may be getting, however, is quite different. A lot of these associates are trying to find a way to stay in their public interests jobs, or at least a related field, and may have given up on law firm work forever.

These new lawyers have found that their new jobs are more fulfilling and more interesting, and — more importantly — they’ve seen that they can live on a smaller salary. As one of my classmates put it, “Add up the hours I worked this week and add up the hours my friends at law firms worked. Divide our salaries by the amount of hours and you’ll see — I’m rich.”

And that, right there, is a perfect example of the difference between money and marginal benefit. Some will argue, incorrectly, that these associates are making a non-rational decision, but that’s not correct at all. The marginal benefit to these recent law grads is much higher at the public interest jobs, and, as that one classmate notes, he’s “rich.”

Filed Under: economics, money, wealth

What Can Small Businesses Anticipate With Health Care Reform On The Way? Well, That Depends…

Predictions

from the Ch-Ch-Ch-Changes dept

After a long Congressional battle, the health care reform bill passed the House last weekend and has left many small business owners wondering what will happen to them. Not all of the details have been brought to light, in part because of the reconciliation process that’s gone on this week. This is somewhat frustrating, since there’s basic approval of a bill without all of the important details — but there are a few that are immediately clear. First off, small businesses with less than 50 employees will be exempt from requirements to offer health insurance. Companies that are a bit larger and getting close to 50 employees should make sure they can document exactly how they count employees and full-time equivalents (FTE). The number of employees will determine the amount of tax credits (or penalties) for offering (or not offering) health insurance.

So where will all this insurance come from? By 2014, the federal gov’t requires every state to set up a Small Business Health Options Program (or SHOP Exchange), so that small businesses can “pool together” to buy insurance plans. If a state fails to set up a SHOP Exchange in time, the federal gov’t will provide one of its own. Still, there’s four years to see what a SHOP Exchange will actually look like — and many predict that these exchanges will start sprouting up before the end of this year.

In the short term, there are some tax credits that small businesses may have available this year, which they should certainly be looking to understand — rather than waiting around. But, on the whole, small businesses may not be required to do anything differently — and might optimistically benefit from the insurance plan competition generated by the SHOP Exchanges. For firms that have around 50 employees, it’s a smart time to start crunching the numbers and to try to forecast what the financial pros and cons are for providing coverage and obtaining tax credits vs. paying fines and letting employees handle their own insurance. Besides the financial impact, business owners should start planning now for consequences such as a reduction in “job lock” — instead of assuming they can deal with managing their employees’ benefits in less than proactive way. With the economy supposedly picking up, employers may see less loyalty from employees and a different view of health care benefits.

In the long run… well, there are still some factors that could change the final outcome of this reform. Thanks to the reconciliation process, some of the language of the bill has been shifting — and who knows what happens after the next election cycle (and, of course, the one after that). While some had said getting health care reform finalized (one way or the other) would at least be good for certainty, there’s very little certainty at all at this point for small businesses, and this game of political football looks like it will continue to be played and many of the provisions don’t come into effect for a few years. At best, it seems like small businesses need to at least pay attention, but not do anything too drastic just yet.

In the meantime, while we wait for the politicians to argue it out, it would be great to hear from any small business owners here, concerning their own experiences in dealing with health care for employees, or suggestions for how the system could or should be improved.

Filed Under: health care, health reform, small business

Why Does Financial Reform Punish Startup Companies And Angel Investors?

Venture Capital

from the not-good-at-all dept

It’s amazing how badly politicians who know a little bit can screw things up. Apparently, Chris Dodd’s financial reform bill contains a somewhat horrifying clause that would seriously harm the ability of startups to raise angel financing. Startups raising angel money are about as far from what caused the financial crisis as anything I can think of, and yet, the financial reform bill contains some ridiculous provisions:

Under existing law, startup companies can raise money easily and quickly from “accredited investors” — individuals with substantial wealth or income. There is no need for the companies or the investors to gain approval from any state or regulatory official.

All of this would change if Section 926 of the Dodd bill is included in any final reform legislation. That section would require, for the first time, companies seeking angel investment to make a filing with the Securities and Exchange Commission, which would have 120 days to review it. This would both raise the cost of seeking angels and delay the ability of companies to benefit from their funding.

The negative impact of the SEC filing requirement would be aggravated by the proposed doubling of the net worth or income thresholds required for investors to be “accredited.”

As someone who has raised a fair bit of money from accredited angels in the past, this proposal would be quite troubling. The idea that a company would need to wait four months before it can get the money it needs would kill a lot of startups. There is no evidence that the angel funding process has been problematic in any way. In fact, some might argue that it’s one part of the financial system that works incredibly well. So why are politicians mucking with it?

Filed Under: angel investors, chris dodd, financial reform, investing, sec

How Can The Startup Visa Be Improved Upon?

Politics

from the fixing-it-bit-by-bit dept

When the startup visa was first put forth by Paul Graham, I was a big supporter. When Brad Feld took the idea and got political support for it, I was still a big supporter. But when the bill was actually introduced, I expressed some serious worries about it — specifically over the fact that it was entirely focused on enterpreneurs who could raise a certain amount of money. As I noted, there were some potentially serious unintended consequences of requiring enterpreneurs to raise a specific amount of money just to stay in the country. The leverage between enterpreneurs and VCs can be a delicate enough balance without adding in the fact that you might get deported if you don’t take the deal being handed to you.

While many of the people I know and respect in the industry have been vocal champions of the current bill, it was good to see at least someone make a big deal of these serious deficiencies in the bill. Pascal-Emmanuel Gobry wrote up a post for Business Insider that basically reflects this same viewpoint. We both think that a startup/entrepreneur visa makes a ton of sense, and it’s something the country needs, but we’re a bit worried by the current bill, which seems entirely focused on venture capital, rather than actual entrepreneurship.

Some have responded and suggested that this is better than nothing, but I’m not entirely convinced of that. A bad bill with unintended consequences could create more harm than good and could derail future attempts to put forth more serious (and needed) reform.

In the end, I think (former VC) Jeff Nolan put it best: this is a “well-intentioned bad idea that shouldn’t be stopped.” The real thing is that it should be fixed. Now, some of the bill’s supporters have suggested that the problems with this bill are necessary, in that it’s the only way they’ll get passed, but that seems like a defeatist attitude. We have an opportunity to actually get this right and to bring smart entrepreneurs who can create a lot of jobs and tremendous value to the US. We shouldn’t rush it through in the easiest manner possible: we should focus on getting it right, even if it takes more effort.

Update: It looks like the folks at the Kaufman Foundation have had similar concerns as well, supporting the concept, but worried about tying it to funding. They suggest an alternative, focused on job creation:

Here’s a way to improve on the Kerry-Lugar plan. Create a true “job creator’s visa,” one tied directly and only to job creation by new immigrant entrepreneurs. The visa could be a temporary one for immigrants already here on another visa who establish a business. It could then be extended if the firm hires at least one American non-family resident. The visa should become permanent once the enterprise crosses a certain job threshold (such as five or 10 workers). But it would not be tied to financing.

There are plenty of immigrants who might qualify: the one million skilled foreign workers now here on H1-B visas who otherwise must go home after six years, as well as the roughly 60,000 foreign students who earn degrees at American universities each year. These are far larger numbers than those who could qualify under the Kerry-Lugar proposal.

Filed Under: enterpreneurs, entrepreneur visa, immigration, startup visa, startups, venture capitalists, visas

The US Postal Service's Business Model Is Outdated. Is It Time To Wind It Down Or Privatize It?

Culture

from the please-mail-me-a-buggy-whip dept

Just recently, we discussed whether or not ceasing Saturday delivery was a good idea for the USPS. John Potter, the US Postmaster General, recently said that the postal service’s business model is as outdated as the newspaper industry’s. Potter said:

“Twenty years ago we would laugh at the notion that a newspaper would ever embrace the idea that maybe the channel of the future is electronic and that you may have to change your business model,”

Sure, similarities between the industries definitely exist. Craigslist is a much cheaper and more efficient marketplace for local goods than the classifieds section in the newspaper ever was, and email is a much cheaper and more efficient means of communication than snail mail. That said, whereas for the newspaper industry, delivering a daily, physical newspaper to households may actually be an endangered business, the business itself of delivering physical items to households is still very much in demand. After all, with so much shopping happening online nowadays, someone still has to deliver the goods (until replicators, a la Star Trek, are perfected). In fact, for over a decade now, we’ve been talking about this opportunity to optimize the “last mile,” and as of yet, nobody has really even come close to solving this problem.

That said, the USPS is a government institution, and even though it does not take any tax funding to run, an attempt to attack this opportunity may best be mounted by the private sector (like UPS and FedEx), especially when you consider the USPS’s projected $238 billion shortfall for the upcoming decade. So, since it’s not a private business, the best solution for the USPS may be to simply accept its diminishing role in the daily lives of Americans, and focus on continuing to run as efficiently as possible for as long as it remains useful. That said, the other solution may be to remove the government-mandated monopoly and privatize the USPS, and then let that private entity decide whether or not to invest in the business. Either way, it seems silly to ask taxpayers to invest anything further in the USPS since so many alternatives exist already. We should definitely all be appreciative of the part that the Postal Service has played in the foundation of our country, but what else can be done?

Filed Under: endangered business, online shopping, usps
Companies: fedex, ups, usps

E-Commerce Sites Realizing They're Media Properties Too

Predictions

from the blurring-lines dept

We’ve talked a lot about the fact that adveritisng is content and content is advertising. But, it seems worth mixing a bit of e-commerce into that story as well. As we’ve been noting (separately), many of the business models that work today have a strong direct-to-consumer component — giving them a “reason to buy.” And, in fact, here at Techdirt, we’ve begun to blur those lines ourselves — with various community offerings, including unique opportunities for companies to participate and/or sponsor online conversations, but also with our own CwF+RtB offering, which is really an e-commerce setup.

In the long run, business models are going to combine all these different elements. As we’ve noted, one of the key scarcities out there is attention — and that’s been the arena that the media business has always been in.

So perhaps it shouldn’t be all that surprising to see traditional e-commerce players beginning to realize this themselves from the other direction. That is, many large online retailers are suddenly recognizing that they get a lot of traffic and they can sell that traffic to advertisers (including advertisers from their own competitors) at a nice premium. Of course, I’m not convinced that traditional banner/text advertising will really be all that lucrative in the long term, but it would be interesting to see online retailers work harder at giving people additional reasons to visit their sites beyond just the products alone. We’ve seen some glimpses of this, such as when Amazon tried to do an online talk show, but I’d bet that we’re going to start seeing some much more creative online retail efforts that introduce “content” into the mix more effectively to create other types of scarcities.

Filed Under: advertising, cwf, e-commerce, online retailers

Truncated RSS Is A Bad Business Decision

Predictions

from the respect-your-audience dept

A few years back, I wrote about why we had found full text RSS feeds to be much more powerful and useful than truncated RSS feeds. The reason that many sites push truncated feeds is the belief that it will force people to click through, and the ads on the webpage are worth a lot more than the ads found in RSS feeds. But it’s a short-sighted view. Because what it’s really doing is trying to push readers to do something that they don’t want to do. Many of them use RSS readers because it’s a more convenient way to organize and read the news they want. And, we found that by making life easier for our readers, we were able to get a lot more readers, and then that allowed us to put in place a better business model that didn’t rely on trying to trick or force them to click through. This is the same debate as the debate over ad blockers. It’s a question of whether or not you respect your community and want to add value for them, or if you just view them as dollar signs and feel you need to force or guilt them into doing stuff they don’t want.

The full text vs. partial text debate is flaring up again as Gawker Media has just shifted all its blogs to partial feed blogs. From my standpoint, this makes it significantly less likely that I’ll link to them, because I’m less likely to actually read through their posts to see if they’re worthwhile. I’ll stay subscribed, but whereas in the past I might read through an entire post before deciding it was worth writing about, now I’ll only have a snippet to make that decision — and that makes it that much less likely that I’ll find their posts worth linking to. And that seems like a mistake.

Matt McAllister from The Guardian responded to Felix Salmon’s blog post (the one linked above), and noted that when The Guardian moved to full text RSS feeds they saw their web traffic go up significantly. Admittedly, there may be other factors involved here, but it’s yet another data point in favor of being open and making it easier for your audience and your community to engage.

What I think both this and the whole ad blocking discussion come down to is a question of how different sites look at and treat their audiences. If they feel they need to take a short-term view and “monetize” every interaction with them, or if they realize that there’s a long-term value in building up a strong and loyal relationship. It’s also quite similar to the constant debates over the music industry — where the music industry feels that it wants to get paid pennies every time you hear a song. That’s the short-term “we have to monetize every use” view, compared to the longer term view, which recognizes that free songs and building up a relationship between the fans and the musicians can lead to something much more lucrative that benefits everyone.

But the key point is made by Salmon in his blog post about this. Others like to accuse Salmon and myself of supporting things like full text RSS feeds, letting people use ad blockers and being against paywalls as “a sense of entitlement.” Of course, since I’m on the publishing side of things, I don’t see how that actually applies to me since I’m defending the rights of the community of readers over short-sited publisher decisions. But the real reason why we think these (well, for RSS and paywalls — I don’t know Salmon’s view on ad blocking) things are important to understand is that taking the simplistic view of trying to maximize short-term monetization is a bad business decision in the long term:

At heart, my argument for full RSS feeds is similar to my argument against a NYT paywall, and neither argument has anything to do with a sense of entitlement on my part. Instead, both are simply bad business decisions. If you truncate your RSS feeds, you’ll get less traffic than you had with full feeds, and you’ll alienate an important minority of your audience. And if you implement a paywall, the increase in subscription revenues will fail to offset the decrease in ad revenues, even as you’ll alienate lots of your audience. So neither makes commercial sense.

Exactly. All of these are decisions that don’t take into account the bigger picture or understand the overall dynamic of a community. They assume that each transaction is a single impact: if this user doesn’t “pay” a site now, it’s “lost revenue.” But it doesn’t take into account that that user might “pay” in other means — via a comment or by passing it along to others. And what if that individual is influential and passes it on to a lot of people? It blocking off that possibility because that individual doesn’t “pay” by ad or paywall seems incredibly short sighted and quite disrespectful of a community.

Filed Under: ad blocking, business models, community, long-term view, paywalls, respect, rss

The Real Problem With The Economy: Misallocation Of Capital?

Ramblings

from the gov't-tinkering dept

Andy Kessler has one of his standard thought-provoking opinion pieces discussing the economy of the past decade, suggesting that the real lesson learned from the past decade is the dangers of bad gov’t policies leading to misallocated capital. Starting with bad telco regulations in the 90s that drove a bubble in unnecessary and misguided investment in infrastructure, some of which overflowed into a ridiculous dot com gold rush:

The late ’90s Internet love fest was crazy enough, driven by former FCC Chairman Reed Hundt’s misguided telecom reform that had the effect of keeping data rates artificially high. This created a gold rush to install fiber and build applications that didn’t make economic sense (though electronic commerce, online banking, as well as wireless and broadband deployment would eventually prove productive over the next decade). Bad policy meant capital got overallocated and too quickly, as momentum mutual funds (momos) and day traders furiously drove up stock prices of every company with dot-com in its name for no fundamental reasons. Wall Street trading was broken.

But, he notes, there was a core of a good idea in there. What made the investment in the internet and new technologies make sense was that it actually did drive productivity. The proper use of such tools increased productivity, decreased costs and opened up new markets. But with the flood of misallocated money, a lot of that got obscured in chasing sock puppets selling pet food.

Following this, there was a combination of bad policy decisions — Greenspan flooding the system with money out of fear of a Y2K problem, combined with Enron freaking people out and leading to Sarbanes Oxley — and a new mess was created:

Instead of finishing what the dot-com era started to deliver–a productive, wealth-producing economy–capital was seduced into the financial lair of private equity and real-estate mortgages. Trillions were pumped into unneeded housing stock. Fannie and Freddie fanned the flames, and then fizzled and failed. And leveraged buyouts reigned. Even in 2007, one Blackstone private equity fund raised almost as much money as all of the venture capital industry.

The key point here is that venture capital tends to (though, certainly not always…) invest in real innovation, nurturing concepts from idea to market and beyond. Private equity, however, is more about just moving money around and looking for quick hit opportunities to get increasing returns. One grows the economy. The other does not. But, by punishing the capital markets that fund real innovation and company growth via Sarbanes Oxley, money that used to go to venture investment went towards the east coast private equity world, where it was shuffled around, rather than invested productively. And, tragically, it doesn’t look like anything the government is doing is designed to fix this:

Today, we are still left with almost no initial public offerings. While private equity fund-raising was down 68% in 2009 to $96 billion, venture capital barely raised $13 billion.

Capital gains taxes are set to return to 20% on Jan. 1, 2011. And worse, investing is as uncertain as ever. No one wants to fund health care, medical devices or even much biotech if they can’t figure out how they are going to be paid via reimbursements from ObamaCare. Energy investing is also a mess. And while “green” investing is booming, with few exceptions that is about efficiency rather than productivity. There’s a big difference: You can make the Post Office more efficient while email makes us more productive and wealthier.

Big regulated oligopolists control our communications infrastructure. Startups are nowhere to be found. Few are willing to take the risk of true venture investing.

It’s been 10 long years since the economy has created real wealth, as opposed to easy-credit induced real-estate or paper wealth. Amidst all the current confusion over health care and tax rates and energy and banking reforms, maybe it’s time that the market transitions back to investments that drive productivity and increase living standards rather than just paper profits.

Reaching back to our economic parables, it’s a question of whether or not our government has been making a giant broken window fallacy. It’s not working on plans that fund actual productivity and economic growth. The government is focused, instead, on getting money moving around again, and all that means is it will move into another unproductive bubble, until we align the incentives properly again.

Filed Under: andy kessler, economics

Sorry, There's No Silver Bullet Business Model For The Music Industry

Bleeding Edge

from the more-like-silver-blanks dept

Forrester analyst Mark Mulligan believes that the problem for the recording industry is one of demographics. Mulligan uses the fact that the billionth application purchaser on iTunes, 13 year-old Connor Mulcahey, was much younger than the 10 billionth iTunes music purchaser, 71 year-old Louie Sulcer, to highlight the issue: older users may still pay for music tracks, but younger users are more likely to “part with their cash” for apps than for music. To Mulligan, the problem is with the current digital-music product itself. Thus, he prescribes a feature-rich app as the savior — and the future — of the music industry. He proposes a music application that wraps digital tracks with social networking, live on-demand footage, song lyrics, games, and forums. This sounds like an interesting idea, which could see some success (if well-executed), but if the music industry is seeking a “silver bullet” business model, this is not likely to be it.

It’s pretty well understood that what has driven the recording industry for decades now is “format change,” where the record companies have continually asked their customers to essentially re-buy their recordings each time a new format is adopted — from records, to cassettes, to CDs. With each new technology, customers were compelled to buy the products not by legislature or law, but rather, by a continual desire to have their music be more accessible. First, the phonograph made music more affordable and accessible, as compared to hiring a band of musicians to come and play in your living room. In the 80s, the cassette tape made listening more portable, albeit with a loss in audio quality. Then, in the 90s, the CD combined both portability and high audio quality into one small package, leading to a huge up-swell in recording purchases. For years, the recording industry has had a fantastic, well-defined business model: Record music that people want to hear on physical media. Sell that media. Repeat. Then, the 00s brought the latest maturation of the recording format, the mp3, with its near-infinite portability and an audio quality that can only really be contested by audio snobs. Since it could be easily copied and used in many different devices, it had the opportunity to become the most widely used music format ever. But, because of its near-infinite portability, the recording industry’s old tried-and-true business model of selling physical media was no longer as viable.

The evolution of recording formats shows that what has really driven the industry has been a hunger for increased accessibility and portability, not necessarily the introduction of new features. So, while Mulligan’s music application idea may drive some interest in recoded music, by empowering the audience to do more with it, it is very unlikely to drive the type of purchasing behavior that, in the past, came with each new recording format — and it certainly won’t “save recorded music.” The problem is that the user is no longer locked into the recording industry’s physical product for the distribution of music. There is no “one thing” they can sell that the audience will have no alternative but to buy. To be successful, the recording industry is going to have to experiment and figure out how make revenue from many different sources, which requires creativity that the labels have so far been unable or unwilling to muster. While the industry is out there looking for the “silver bullet” of a business model, the reality is that the answer is more like a whole clip full of silver bullets, coupled with some garlic, and finished off with a wooden stake or two.

Filed Under: business models, music industry