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Wednesday, April 18, 2012
The Administration strongly opposes House passage of H.R. 9. The President believes that small business tax relief can promote hiring workers and increasing investment here at home. H.R. 9, however, is not focused on cutting taxes for small businesses, but instead would provide tax cuts to the most fortunate. Under the bill’s definition of income, many of the “small businesses” that would receive the largest tax breaks are law partners, consultants, and other wealthy individuals and corporations with the biggest profits. The proposal is a giveaway that will cost $46 billion and could, in fact, lead to delays and reductions in investment and hiring.
While H.R. 9 has been described as a way to help small businesses, independent non-partisan analyses confirm that 49 percent of the bill’s benefits would go to taxpayers making more than $1 million per year. Individuals in higher tax brackets would be able to take the bill’s deduction against higher tax rates, making it more valuable for higher earners and more profitable firms. For the one percent of individuals with small business income in the top tax bracket and for profitable corporations, the deduction is worth more than double what it is worth to the two-thirds of small business owners in the 15 percent bracket or lower. Moreover, because “small business” is broadly defined and the tax relief is conditioned only on the size of payroll, many very large and highly profitable firms will be eligible for the tax break. The Administration believes that this bill is not an effective way to incentivize small business investment and job creation.
Furthermore, under H.R. 9, small businesses that invested or hired more this year would, in many instances, get a smaller tax cut than those that did not, because the bill would have the deduction taken against the amount of a company’s net income from which wages for new workers or long-term investments in equipment are actually subtracted. With the deduction only available for one year, it is likely that some firms would reduce or delay new hiring or new investment as a result. The bill also opens up avenues for potential abuse, allowing a deduction for payments to family members who have been “hired” for the year as well as creating an incentive for firms to try to re-characterize current activities to earn the deduction.
Congress should act to help American small businesses hire and grow with targeted tax relief designed to boost jobs, rather than tax cuts for the most fortunate that actually discourage investment. In both his Budget and his business tax reform framework, the President put forward an ambitious plan to simplify small business tax returns and provide tax relief — including targeted employer tax relief that conditions its benefit on actual new hiring, directly encouraging job growth. Those proposals build on the 17 small business tax cuts that the President has already signed into law, ranging from the small business health tax credit to more generous depreciation. The Administration believes that this legislation fails to accomplish these goals. If the President is presented with H.R. 9, his senior advisors would recommend that he veto the bill.
The Small Business Tax Cut Act of 2012, sponsored by House Majority Leader Eric Cantor (R-Va.), would slash taxes on the adjusted gross income of as many as 22 million small businesses -- those with fewer than 500 employees -- by as much as 20 percent for one year. It would add $46 billion to the deficit.
April 18—House Ways & Means releases Committee Report for Small Business Tax Cut Act.
The House Ways & Means Committee recently released H. Rept 112-425, the Committee Report for H.R. 9, the “Small Business Tax Cut Act.” The House Report contains an explanation of the bill provisions, estimated revenue effects, and text of the proposed legislation. H. Rept 112-425 also contained a dissenting statement by the Democratic minority. The White House has said the President would veto the measure if it passes Congress because the Administration believes that “this bill is not an effective way to incentivize small business investment and job creation.”
H.R. 9, which was introduced by House Majority Leader Eric Cantor (R-VA), would allow qualified small businesses (those with fewer than 500 employees) to claim a new 20% deduction. In general, the deduction, which would be similar to the Code Sec. 199 domestic production activities deduction (and would be coordinated with that deduction), would be equal to 20% of the lesser of:
(1) qualified domestic business income (generally, domestic business gross receipts less cost of goods sold allocable to such receipts, less other expenses, losses or deductions allocable to such receipts); or
(2) taxable income (without regard to the new deduction) for the tax year.
The new small business deduction couldn't exceed 50% of the greater of: (a) W-2 wages paid to non-owners of the business; or (2) W-2 wages paid to non-owner family members of direct owners, plus W-2 wages paid to 10%-or-less direct owners. Certain partners' distributive shares of partnership items could be treated as W-2 wages for purposes of the new deduction.
For a qualified small business that is a partnership and that so elects, the portion of the entity's qualified domestic business taxable income for the tax year that is allocable to each qualified service-providing partner would be treated as W-2 wages paid during that tax year to an employee who is a 10%-or-less direct owner. The domestic business gross receipts of the partnership for the tax year would have to be reduced by any amount treated as W-2 wages under this rule. Under an amendment in the nature of a substitute to H.R. 9, a qualified service-providing partner would be any partner who is a 10%-or-less direct owner and who materially participates in the trade or business to which the income relates.
Gross receipts and W-2 wages taken into account under the new deduction could not be taken into account for Code Sec. 199 purposes.
The bill, which would apply for the first tax year of the taxpayer beginning after Dec. 31, 2011, does not carry any offsets to pay for the small business deduction.
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