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William Perez

Proposed: the Small Business Tax Cut Act

By April 23, 2012

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The House of Representatives on April 19th, 2012, voted in favor of passing the Small Business Tax Cut Act (HR 9).

The bill proposes a new tax deduction for small businesses with 500 or fewer full-time-equivalent employees. The proposed deduction would enable small businesses to take a deduction of 20% of net income, with the amount not to exceed 50% of wages paid to employees who are non-owners of the business. This would be a one-year only deduction for the first tax year of the business following December 31, 2011, that is for the year 2012 in most cases.

This new deduction appears to be modeled on the Section 199 deduction in that the businesses are able to obtain a federal tax deduction without incurring additional out-of-pocket expenses.

The deduction is targeted specifically as domestic business revenues, as opposed to a business's global revenues, and further targets small businesses with 499 or fewer employees who are not significant owners of the business. (So small businesses whose only employees are the owners of the firm won't qualify for the proposed deduction.)

The math for the proposed deduction for domestic business income of qualified small business goes something like this:

20% x (domestic gross receipts - (cost of goods sold and other expenses, deductions or losses related to domestic gross receipts)), the resulting product must be less than or equal to 50% of W-2 wages paid to non-owners.

The Small Business Tax Cut Act is estimated to reduce federal tax revenues by about $45.95 billion, according to the Joint Committee on Taxation (JCX-30-12).

"The $46-billion measure faces a veto threat from President Obama and is unlikely to get a vote in the Democrat-controlled Senate," observes tax publisher CCH in their Weekly Report.

The Small Business Tax Cut Act passed the House with 235 representatives voting in favor of the proposal and 173 representatives voting against the proposal (Roll 177).

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