A short-term fix

During the 2008 campaign, Barack Obama laid out a strategy for economic recovery that included targeted tax breaks aimed at spurring job creation, particularly by aiding small businesses. One of those small business tax breaks that Obama proposed was the complete elimination of capital gains taxes on investments in "small and start up firms”.

Capital gains taxes are taxes on profits made on the sale of an asset. Rates vary mainly depending on the type of asset sold and how long the asset has been held, with higher rates for assets held less than a year.  When Obama took office, investors were allowed to exclude from taxation 50% of the profit made from putting money into small business.

We last checked on this promise in February, 2009, and rated it "In the Works” because of progress made under the American Recovery and Reinvestment Act, better known as the stimulus. A provision tucked into the act raised the percentage of small business investment excluded from capital gains tax from 50% to 75%. That provision was to be in effect for the 2009 and 2010 tax years.

Eighteen months later, Obama and House Democrats sought to increase the exclusion as part of small business legislation they labored to get through Congress during the summer of 2010. The finished product, the Small Business Jobs Act of 2010, signed by the president Sept. 27, 2010, went further -- but with some limitations.

First, the elimination of capital gains tax on small business investment applies only to investments held for five years. What"s more, the exemption only applies to investments made from the bill"s enactment through the end of 2010. On Jan. 1, 2011, the exemption goes back to the pre-stimulus level of 50%.

"He kept his promise, but we don't think it will help many small businesses”, said Melissa Sharp, a spokeswoman for the National Federation of Independent Business.

Sharp"s contention is that by limiting the tax break to investments to one type of small business, C-Corporations, with less than $50 million in assets, that much of the provision"s usefulness is curbed. She said that less than 25% of small businesses are eligible under those rules.

Those who crafted the bill claim that the tax break appropriately targets those who would benefit from the exclusion, that most ineligible businesses are operations such as restaurants and doctor"s offices that wouldn"t necessarily be making significant investments subject to capital gains taxation.

Nonetheless, we"re focused on whether Obama fulfilled the promise he made on the campaign trail more than two years ago. Since the law effectively eliminates capital gains taxation for some small businesses, but only for investments made before the end of 2010, we rate this as a Compromise for the White House.