New legislation brings about concern for small businesses

Rough Notes, May 2000 by Zinkewicz, Phil

With today's proliferation of large corporate mergers, the small business community and issues involving its survival often are shuffled to the back pages of daily newspapers. In the current business environment, a great deal of attention is being paid to the Travelers, the Citibanks, the AOLs and the Time Warners, while small businesses and their problems are being given short shrift. Especially in the area of new legislation, small businesses too often find that they are fighting an uphill battle.

A prime example of this is last year's passage of the Ticket to Work and Work Incentives Improvement Act of 1999. A small provision of this act went undetected by insurance industry lobbyists who were spending a large portion of their time hammering out a much more important financial services modernization law. This provision created a serious hardship on small businesses. Now insurance industry lobbyists, having finally discovered the problem, are trying to get this provision repealed.

The provision of the tax law, which basically was intended to increase federal revenues, prohibits the use of the installment sales method of accounting, meaning that small, community-based and family run businesses would not be able to sell their businesses on an installment basis. The installment sales method is used in a significant number of small business sales. In some sectors of the economy, installment sales may be used in as many as 9 of 10 transactions. The installment method enables sellers to be more flexible in structuring the sale and get a higher price for the business. For buyers, it allows them to purchase a business for which they cannot pay fully upfront and for which they cannot get bank financing but which they can afford on an installment basis. The provision in the new tax code bans this option for accounting and tax reasons.

The Small Business Legislative Council (SBLC)--a coalition of 80 trade and professional associations representing small business in manufacturing, retailing, distribution, professional and technical services, construction, transportation, tourism and agriculture-has called upon Congress to reverse course and repeal the prohibition on installment sales. In a letter to members of Congress, the SBLC said, "We have become increasingly concerned that the installment method of accounting repeal provision is having unintended but very real adverse consequences for the small business community Unfortunately, it has now become clear that `seller financing' of small businesses sales, a common characteristic of such transactions, is at risk."

John Satagaj, president of the SBLC, has asked for a "full repeal" of the ban provision, adding that if it cannot be repealed, then at least the sales of closely held companies should be exempted. "There is no legitimate reason for restricting installment sales where the business is being sold in whole, either through a sale of assets or stock," says Satagaj.

Phil Theoden, tax lobbyist for the Associated General Contractors of America, says his group, also, is concerned about the ban. He said his tax committee, which includes CFOs and CPAs of small businesses in the construction industry, has had a number of meetings and is also opposed to the prohibition.

But the little-known provision of the tax law has a double whammy for independent insurance agents. Not only are their insureds, which constitute the very heart of small businesses in main street America, affected by the provision, but they as small businesses are affected as well.

The Independent Insurance Agents of America and the National Association of Professional Insurance Agents have come out strongly against the installment method of sales prohibition and in favor of total repeal.

"The installment sales ban was originally intended to target the sales of larger corporations but is having a much harsher impact on small businesses, such as independent insurance agencies," says IIAA Vice President Robert A. Rusbuldt. "IIAA member agencies that are being affected by the ban are not major, national corporations." Rather, he says, they are members of the small business community. "The unintended consequences of the installment sales ban is that it is driving down the sales price of literally hundreds of thousands of small businesses across the country," said Rusbuldt in testimony before Congress, "including independent insurance agencies. When this ban went into effect, the sales price of small businesses immediately dropped by as much as 20%. Many small business owners have worked hard their entire lives to build up the worth of their businesses, only to see their value plummet when they try to sell them. The effect of the installment sales ban is unacceptable. The ban must be repealed."

The PIA National expressed similar sentiments and announced its support for legislative remedies.

The House already has approved legislation that would repeal the ban. In the Senate Senator Conrad Burns (R-Montana) has offered 5.2005, simply titled, "a bill to repeal the modification of the installment sales method."