Bridge Act Could Be Boon for Small Businesses

Barely noticed bill would allow fledgling companies to defer -- then invest -- tax money.
Lisa YoonOctober 23, 2001

Small businesses may be the engine of economic growth, but managers at many of those companies are having trouble obtaining a little petrol. With a recession in full sway, finance executives at small companies are finding it increasingly difficult to raise capital for expansion. To help entrepreneurial companies scarce up some investment money, Congress is now considering a bill that would allow small businesses to essentially buy now, pay later.

Called the Business Retained Income During Growth and Expansion (Bridge) Act of 2001, the unheralded tax-deferral bill was submitted last week to the House of Representatives. If passed, the Bridge Act will enable managers at a small company (annual revenues of under $10 million) to defer up to $250,000 in federal taxes and reinvest the money into their business. Under the terms of the act, companies would begin repaying the taxes (with full interest) after two years. The repayment would be spread over a four-year period. As currently made up, the bill would be in force for five years, subject to renewal thereafter.

Though the proposal was completed in time to be included in the Administration’s economic stimulus package, it was actually conceived two years ago, says Sam Norwood, a partner at Tatum CFO Partners LLP, a provider of CFO services. Tatum executives, who championed the Bridge concept, noticed that many profitable “emerging companies” were not able to get funding from more-traditional sources of capital. Further, smaller businesses rarely have enough collateral to land a sizable loan or line of credit from a bank. “Most financial institutions aren’t interested in helping companies [looking for] less than $1 million,” says Norwood. Such companies usually rely on the credit lines of a single person, often the founder or owner.

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Since government authorities will see a net gain from BRIDGE repayments, the bill, co-sponsored by Rep. Jim DeMint (R-S.C.) and Rep. Brian Baird (D-Wash.) has bipartisan support in the House. But the question is, if the Bridge Act is passed, will a mere $250,000 do a small business much good?

Norwood says yes. “For companies that small, every bit helps,” he insists. The key, he argues, is using the funds to help the company grow. “Just as there is a relationship between revenues and number of employees — as the company grows, the number of employees grows — there is also a relationship between amount of capital and revenues,” he explains. Typically, revenue is around three times capital invested. Hence, the more investment capital, the greater the income — assuming the capital is invested wisely.

Nevertheless, some critics say legislators have no business trying to jump-start business. “The economy may be going through a hiccup now, but it’s fundamentally sound,” says Alan Beckenstein, professor of business administration at the University of Virginia’s Darden Graduate School of Business. “It’s best not to play a bunch of games and mess everything up.” Rather than draw up ad hoc legislation targeted at specific sectors, Beckenstein believes, lawmakers should strive to maintain consistent economic policies.

But Norwood insists that the bill is not a stopgap measure. “There’s been a constant effort to make this come to pass,” he says. He also claims the Bridge Act would do more than just plump up the coffers of the Internal Revenue Service.

He may be right. According to the Kaufman Foundation for Entrepreneurial Leadership, a Kansas City-based think tank, Bridge investments would add up to 600,000 jobs in the United States within three years of enactment. What’s more, the Kaufman Foundation estimates that retained income investments would help small businesses generate about $6 billion in new revenues in the first year following passage of the Act.

Still, it remains uncertain whether the House of Representatives will pass the Bridge Act. With the war against terrorism in full swing, granting a tax break to small businesses may not exactly rate as a high priority for many overworked legislators. But backers say the bill will pass — if they can get House members to think like CFOs. “The challenge is in educating legislators on the role of the balance sheet,” Norwood says. “The necessity for capital for growing businesses is a new idea to them.” Swell.