A mere three days after the Senate failed to advance the Democratic-sponsored Buffett Rule, the House is set to gather today and vote on a Republican proposal that would grant a tax deduction equal to 20% of taxable income for every business with less than 500 employees.
Billed as a “small business” tax break by its creator, Republican House majority leader Eric Cantor, the proposal came under intense criticism after an independent analysis by the Tax Policy Center revealed that 49% of the benefits of the plan would be reaped by businesses earning over $1,000,000 per year. This is a rather logical result, considering 99.7% of the nation’s businesses have fewer than 500 employees, but the bill has moved forward nonetheless.
- The deduction would be added to the Code as I.R.C. § 200, a nod to the domestic production activities deduction of I.R.C. § 199 — the provision the new law would be most closely tied to in terms of computation.
- The 20% deduction would be equal to 20% of the lesser of:
(1) qualified domestic business income (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 deduction can’t exceed 50% of the greater of 1) 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 (all using the constructive ownership rules of I.R.C. § 267). This provision has drawn considerable heat, as it precludes sole-proprietorships and wholly-owned businesses with no outside employees from taking the deduction.
- Certain partners’ distributive shares of partnership items can be treated as W-2 wages.
Of course, when Republicans control the House but Democrats control the Senate and White House, tax votes are of little consequence, and this one appears no different. As a preemptive “FU” to Republicans, President Obama has already vowed to veto the bill should it make its way to his desk. Publicly, the President has echoed the concerns of other Democrats that the proposal is an ineffective way to spur the economy and favors too many “large” businesses, but I’ve got to think there’s an element of payback involved for the manner in which his beloved Buffett rule was unceremoniously dumped by Republicans in the Senate.