House Majority Leader Eric Cantor (R-VA) recently introduced the Small Business Tax Cut Act of 2012 (the “SBTCA”), which proposes a one-year tax deduction for qualified small businesses. Under the SBTCA, a small business with fewer than 500 employees would be allowed to deduct 20 percent of its taxable income or domestic business income, whichever is less. The deduction would apply regardless of the form of business organization.
The deduction is limited to 50 percent of the greater of (1) W-2 wages paid by the taxpayer to non-owner employees, or (2) the sum of W-2 wages paid by the taxpayer to (a) employees who are non-owner family members of direct owners and (b) employees who are 10-percent-or-less direct owners. In some cases, income allocations to partners could be treated as W-2 wages. The 50% W-2 wage limitation is similar to the limitation under the domestic manufacturing deduction, with which the SBTCA deduction would be coordinated. The Joint Committee on Taxation also published JCX-30-12 to explain the SBTCA.
Cantor’s press release provides the following illustration of how the SBTCA would operate: Assume that a small business under current law would pay a 35% federal tax on $100 of income, resulting in a $35 tax bill. Under the House proposal, this small business would be able to deduct 20% of its income from tax (20% of $100 = $20), subject to the 50% W-2 wage limitation. The small business would then pay the same 35% tax on the remaining $80, resulting in a $28 tax bill. Under the SBTCA, the small business would save $7 in federal taxes.
The SBTCA has been referred to the House Committee on Ways and Means. If enacted in its current form, the SBTCA would apply for a taxpayer’s first taxable year beginning after December 31, 2011.