Ways & Means Releases Committee Report on 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); o

(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.