Mendo Island Journal — Timely. Useful. Sometimes Cranky.

Sheilah Rogers: Rural Matters

In Dave Smith on August 19, 2010 at 7:48 am



Westside Renaissance Market, Ukiah

From SHEILAH ROGERS
Redwood Valley

The Rural Microbusiness Investment Credit has been introduced in the House (H.R.5990) and as an amendment to the U.S. Senate Small Business Jobs Bill and will build on the Rural Entrepreneur Assistance Program in the 2008 Farm Bill.

Microenterprise is always a critical source of employment in most rural areas, but it is especially critical during a recession. During our last recession, between 2000 and 2003, employment grew in microenterprises while growing slowly or falling for larger employers. Nationwide employment grew in microenterprise 9.17% while falling 1.8% in larger firms.

Microbusinesses, particularly under-capitalized rural ventures, have always faced significant barriers securing financing from traditional banks and the increasing competition for limited credit is hitting microentrepreneurs particularly hard. As conventional bank lenders pull back on their small businesses lending entrepreneurs are forced to look for alternative sources of financing.

The Rural Microbusiness Investment Credit (RMIC) is designed to generate investment in both startup and expanding rural microbusinesses by providing a federal tax incentive, in the form of a 35 percent tax credit, to entrepreneurs who invest in their businesses. Beginning farmers and ranchers are also eligible.

The RMIC is a capped credit in that no single individual can secure more than $10,000 in tax benefits over a lifetime – meaning the RMIC can be used to offset up to $28,500 in qualified microbusiness expenses.

A microbusiness owner would be able to carry back the RMIC for five years and use it to offset taxes in those previous years. This is critical for startup businesses, which typically don’t pay taxes in the initial year, as well as for businesses in the midst of recession that may not need tax breaks but do need assistance in making critical investments.

The RMIC is specifically targeted to entrepreneurs who are operating businesses in economically distressed rural areas where access to capital has always been a challenge and is even more difficult with the recent decline in bank lending to small businesses.

Rural Microbusiness Investment Credit Q&A

How would a business owner qualify for the Rural Microbusiness Investment Credit?

In order to take advantage of the Rural Microbusiness Investment Credit (RMIC), a microentrepreneur must own and operate a business with no more than five employees and the business must be located in a distressed rural area.

The RMIC defines a distressed rural area as any area with a population of 50,000 or less and has lost at least 5 percent of its population over the last 10 years; has lost 10 percent of its population over the last 20 years; has a median family income below 85 percent of the national median family income; has a poverty rate in excess of 12.5 percent (Mendocino County 2008 -17.7%); or has experienced unemployment greater than 125% of the national average in the year prior to when the credit is taken.

Has this model been tested?

In 2005, the State of Nebraska enacted a 20 percent investment tax credit on up to $50,000 of investment in microenterprise – owner operated businesses with up to five employees. The cumulative credit was capped at $2 million annually. The credit has provided an effective stimulus with demand outstripping the $2 million in each year since its creation.

What is the difference between a Small Business and Microbusiness?

The Small Business Administration (SBA) generally defines a small business as a business with fewer than 500 employees with average annual receipts of $7 million or less and a very small business is defined a business with 20 or fewer employees.

For purposes of the proposed Rural Microbusiness Investment Credit (RMIC), microbusiness is defined as an owner operated business with five or fewer employees and annual gross revenues that do not exceed $1 million.

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  1. Good stuff, Sheilah. Another interesting study out in July shows that net job growth occurs in the U.S. economy ONLY through startup firms.
    EXCERPTS:
    Contact: _Rossana Weitekamp, 516-792-1462, rossana@weitekamp.com _Barbara Pruitt, 816-932-1288, bpruitt@kauffman.org , Kauffman Foundation
    New firms add an average of 3 million jobs in their first year, while older companies lose 1 million jobs annually
    (KANSAS CITY, Mo.), July 7, 2010 – When it comes to U.S. job growth, startup companies aren’t everything. They’re the only thing. It’s well understood that existing companies of all sizes constantly create – and destroy – jobs. Conventional wisdom, then, might suppose that annual net job gain is positive at these companies. A study released today by the Ewing Marion Kauffman Foundation, however, shows that this rarely is the case. In fact, net job growth occurs in the U.S. economy only through startup firms.
    The study reveals that, both on average and for all but seven years between 1977 and 2005, existing firms are net job destroyers, losing 1 million jobs net combined per year. By contrast, in their first year, new firms add an average of 3 million jobs.
    HOW ABOUT THAT?

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