Small Biz Tax Bills Introduced in House and Senate

March 28, 2012

Leaders in both the House and Senate have offered varrying small-business tax packages. The first was offered last week by House Majority Leader Eric Cantor (R-Va.), backed by House Ways And Means Committee Chairman Dave Camp (R-Mich.) which would offer a 20 percent tax decuction for small businesses. The second package was introduced Monday by Senate Majority Leader Harry Reid (D-Nev.) and Sen. Charles Schumer (D-N.Y.) which would provide a hiring tax credit as well as extend the 2011-level bonus depreciation which expired at the end of last year.

House Tax Package

The Small Business Tax Cut Act (H.R. 9), was introduced on March 21 and will allow businesses with fewer than 500 employees to take a tax deduction equal to 20 percent—for one year—of their active business income. This deduction also would apply to pass-through entities, which compose the majority of small businesses. Chairman Camp indicated at its introduction that the committee will consider the legislation and aims to hold a markup of the measure on March 28.

In the case of a qualified small business, the provision allows a deduction for 20 percent of qualified domestic business income of the taxpayer for the taxable year, or taxable income for the taxable year, whichever is less. However, a taxpayer’s deduction for any taxable year may not exceed 50 percent of certain W-2 wages of the qualified small business.

The bill would make the deduction more easily available than a version introduced in 2010, which contained dozens of exclusions including accounting firms, actuarial firms, financial services and brokerage firms, among others. Cantor also opted to use the U.S. Small Business Administration’s definition of a small business to determine who qualifies for the tax cut: “any employer engaged in a trade or business if such employer had fewer than 500 full-time equivalent employees for either calendar year 2010 or 2011.”

The House is expected to take up the bill during the week of April 16. Cantor said his decision to pursue the narrowly crafted measure is based “on the same concept as behind the JOBS Act,” which passed the House by a wide bipartisan margin. He has indicated that he would like to drive toward overall tax reform this year but that he views the 20 percent tax cut as a necessary step “while we are working toward that goal.”

Senate Tax Package

Meanwhile, Senate Democrats, led by Majority Leader Reid, unveiled a $26 billion tax-cut bill on March 26. The Small Business Jobs and Tax Relief Act of 2012 is designed to give small businesses a 10-percent income tax credit on new payroll for hiring new workers or increasing employee wages and will allow businesses to fully deduct the cost of significant investments made this year. The $26 billion in tax cuts would be temporary and apply only to 2012 wages and investments.

The bill sets a limit on the hiring tax credit at a maximum increase in eligible wages of $5 million per employer and the amount of the credit would be capped at $500,000.

As part of efforts to help stimulate the economy, Congress approved for 2011 expanded bonus depreciation of 100 percent of the purchase of new equipment placed in service in 2011. However, because Congress failed to extend that provision, it reverted to just 50 percent in 2012 and–unless additional language passes–will go away entirely in 2013. The Reid/Schumer tax package would only extend full depreciation for 2012.

While both measures could be positive for small businesses, the only true way to ensure fairness, transparency and eased complexity of the U.S. tax code is broad tax reform. Such broad reform is the best approach to spur long-term job creation, rather than piecemeal fixes.

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National Small Business Association

National Small Business Association