By Albert B. Crenshaw

Surveys by the Federal Reserve and others show that banks are tightening their lending standards, a process that is usually bad news for small businesses. But surveys by the National Federation of Independent Business and others show that most small businesses aren't finding credit to be a major problem.

What's going on?

Several things, according to the Fed and the NFIB.

First, deregulation and the growth of risk-based pricing have allowed banks to charge interest rates commensurate with the risk of the loans they make. So, while small businesses may in some cases pay more, they are less likely than in years past to be rejected.

Second, both banks and many businesses are on a much sounder footing than they were going into the 1990s. A decade of strong economic performance has enabled both sides to clean up their balance sheets. Thus, many businesses now qualify for loans even under tighter standards -- and banks are better positioned to offer credit.

"Although risky borrowers face close scrutiny, banks apparently have continued to accommodate the needs of their creditworthy business customers, while bank lending rates, on average, have moved lower," Fed Vice Chairman Roger W. Ferguson Jr. told the House Small Business Committee last week.

"I do not believe we are in the midst of a credit crunch, nor do we face one" in the immediate future, Ferguson said.

Finally, and on a less optimistic note, NFIB chief economist William C. Dunkelberg said there seems to be about a six-quarter lag between the time Fed surveys pick up tightening conditions and the time small businesses start finding credit hard to get.

There appears, in fact, to be "only a loose relationship between Fed measures of 'tighter standards' and . . . the percent of NFIB members reporting loans 'hard to get,' " he said.

But if six quarters -- 18 months -- is a guide, next year could be a not-so-great time to be financing a small business.





Now that the Senate Finance Committee has approved wiping out the estate tax, opponents of repeal are taking a different tack in their efforts to derail it.

The bill, they say, isn't nice enough to the sort-of wealthy.

It's complicated, but here's the gist of it. Under the Senate bill, which differs in several respects from the House version passed earlier, the estate tax wouldn't be repealed until 2011. From next year to 2011, there would be a phaseout, during which tax rates would be reduced and the tax exemption allowed for smaller estates -- currently $ 675,000 and less -- would rise, topping out at $ 4 million in 2010.

During the phaseout, the current "stepped-up basis" system would be retained.

"Basis" is a tax term for the amount an owner has paid for an asset, plus or minus certain adjustments. It is the amount that is subtracted from the proceeds when the asset is sold to calculate the capital gain or loss.

Currently, the basis is "stepped up" at death from the amount the deceased person paid for the asset to the value it had at his or her death. As a result, if heirs sell inherited assets immediately, they generally pay no capital gains tax.

Estates that exceed the exemption amount, of course, pay estate taxes, but those that are smaller get a free pass -- no estate taxes and, with the stepped-up basis, no capital gains for the heirs, except on any post-inheritance appreciation.

By boosting the exemption amount to $ 4 million, the bill gives a free pass to larger estates during the phaseout.

But after repeal, the stepped-up basis is eliminated for assets over $ 1.3 million. Assets over that limit would get the "carry-over basis." In other words, their basis would be the same as it was when the dead person owned them.

Voila[acute], say the critics, estates of $ 1.3 million to $ 4 million would be worse off after repeal than before it.

However, for several reasons this is a feature that many small-business owners can ignore.

First, basis matters only if there is a sale. A key goal of repealing the estate tax, according to proponents, is to eliminate situations where heirs are forced to sell the family business or farm to pay the estate taxes. After repeal, those who don't sell won't owe tax. If they choose to sell voluntarily, it seems reasonable to expect them to pay capital gains tax.

Remember, the top rate on long-term capital gains is 20 percent, and it is levied only on the gain. On estates, the top rate is 55 percent, and it is levied on the entire value of the assets, minus debt.

Second, the $ 4 million exemption is in effect only in 2010. It's $ 1 million next year and rises over the subsequent years. True, two spouses who have the foresight to die in 2010 could pass along a total of $ 8 million with no estate taxes and a stepped-up basis, but less than that in years 2002-09.

Plus, after repeal the bill would allow a person to pass along to any heir $ 1.3 million with a stepped-up basis and another $ 3 million with a stepped-up basis to a spouse. And when that spouse dies, he or she would also be entitled to a stepped-up basis on $ 1.3 million in assets. Thus, a couple between them could bequeath $ 5.6 million to their children with a stepped-up basis.

In addition, the bill allows heirs to benefit from any capital losses, net operating losses and certain built-in losses from an inherited business. Such losses can be used to reduce the taxable gain when an owner sells a business, but at the owner's death they evaporate for tax purposes under current law. The effect of the change would be to magnify the impact of the stepped-up basis for the heirs.

The bill also preserves the $ 250,000 capital gain exemption for sale of a principal residence, and further allows an heir who moves into the house to "tack" the decedent's period of residence onto her own. That typically qualifies the heir for the two-year occupancy required to exclude her own $ 250,000 of gain. Thus, an heir may be able to exclude up to $ 500,000 of capital gain on an inherited residence -- such as the house on the family farm.

This may not add up to $ 8 million, but it's not exactly shabby, and the stepped-up basis figures are to be adjusted for inflation.





Members of Congress are filling up the hoppers with bills designed to help small business. Whether these measures will ever get beyond this stage is, of course, highly uncertain, but that doesn't stop the members.

One that has made some progress is the Small Business Liability Relief Act, introduced by Rep. Michael G. Oxley (R-Ohio), which would exempt businesses with 100 or fewer employees and $ 3 million or less in gross revenue from liability under the Superfund environmental cleanup law for past treatment or disposal of hazardous materials, if the treatment or disposal was not greater than 110 gallons or 200 pounds.

Among other measures introduced recently:

* A bill by Senate Small Business chairman Christopher S. Bond (R-Mo.) and ranking minority member John F. Kerry (D-Mass.) that would extend through 2010 the Small Business Technology Transfer Program, a federal program that fosters joint ventures between small businesses, universities and nonprofit institutions, and fosters high tech economic development.

* A bill by Bond that would make it easier for individuals to qualify as independent contractors by providing an alternative to the current "20 factors" test.

* Another bill by Bond that would extend the Small Business Regulatory Enforcement Fairness Act's requirement that certain agencies conduct small-business panel reviews of proposed regulation. Under the measure, the Internal Revenue Service, the Forest Service, the National Marine Fisheries Service and the Fish & Wildlife Service would be added to the list.