House Bill Would Cut Taxes on Businesses With Fewer than 500 Employees

A new House proposal could cut taxes on small companies, including manufacturers.
Marielle SegarraMarch 22, 2012

A new House proposal to cut taxes on small business might give a boost to manufacturing. The bill would allow companies with fewer than 500 employees to take a 20% tax deduction.

Bill sponsor and House Majority Leader Eric Cantor (R-Va.) contends the plan would stimulate growth by giving small companies the cash to expand their payroll. The bill “will put more revenues, more money into the hands of small-business owners so that they can reinvest those funds to retain and create more jobs and to grow their business,” he said Wednesday.

Under the proposal, companies would take the deduction after they’ve taken all their other tax credits, unless they would save less by taking a 20% deduction on their annual domestic business income. Businesses would be allowed to save up to half of what they pay in W-2 wages.

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It remains to be seen whether the proposal could pass the Senate and President Obama’s desk in a campaign year. In many ways, the bill contrasts with the President’s corporate tax reform plan, which proposed eliminating many tax breaks and lowering the overall corporate-tax rate from 35% to 28%.

But in other ways, the bill may actually dovetail with the President’s push to strengthen American manufacturing through tax policy, says Dean Zerbe, national managing director at alliantgroup and former tax counsel to the Senate Finance Committee. By setting the maximum at 499 employees, the proposal could bolster manufacturing by going beyond more-limited definitions of a small business, he says. “What I see too often is that policy makers have a far-too-tight definition of small businesses,” says Zerbe. This plan’s size limit would provide cash for the companies that are most likely to grow and hire, such as small manufacturers that have dozens, or even hundreds of employees, he says.

Indeed, Democrats and Republicans may be able to find common ground in their shared efforts to cut taxes on businesses, including manufacturers, Zerbe says: “The parties are at least within spitting distance of each other. You had the President talking earlier this year about a tax for businesses with the payroll employment tax, and now you have Republicans coming out with their proposal to help businesses. Clearly, both parties are interested in talking about business tax breaks.”

The gap may be bridgeable, but it’s unclear whether or not the two sides will see the similarities — or choose to collaborate, says Zerbe. “I’m afraid at the moment that it’s probably more of a policy exercise,” he says.

The bill may also see some opposition because it would be yet another temporary tax cut, says Grafton Willey, managing director at CBIZ Tofias, a tax-consulting firm.

A 20% deduction, even if temporary, would help small businesses boost their cash flow, Willey admits. But he says business owners are more interested in consistent, clear tax policy than in short-term breaks. “What small businesses and the economy really need is some long-term, consistent tax policy that will allow businesses to plan,” Willey says. “The quick temporary fixes do not motivate behavior the way that politicians think they do.”

The House plans to vote on the bill in mid-April.