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Hedge Fund Tax Break May Come in Republican Plan

A Republican proposal to give small businesses an extra 20 percent tax deduction may yield cuts for some multibillion-dollar hedge funds, law firms and other enterprises that create significant profits with few employees.

Republicans hope to release details of the bill during the week of March 19, said Laena Fallon, a spokeswoman for Representative Eric Cantor, the House majority leader. Cantor told House members in a memo last month his plan would let “every” business with fewer than 500 employees deduct 20 percent of its profits.

That approach would depart from restrictions in an earlier version. Legislation introduced when Republicans were campaigning to take over the House majority in 2010 would have prevented companies in health, law, finance, architecture and other industries from qualifying for the break.

Abandoning those limits would make professional sports teams, liquor stores and hedge funds including Renaissance Technologies LLC, Paulson & Co. and Och-Ziff Capital Management Group LLC eligible to claim the tax break.

“It’s never simple with tax policy,” said Representative Dave Camp, a Michigan Republican and chairman of the House Ways and Means Committee. Camp and Fallon said the latest version of the proposal hasn’t been completed.

“I don’t want to enumerate what that might be,” Camp said in a March 6 interview when asked what limits Republicans might include. “One of the considerations you have to have as you look at any tax bill is how far-reaching it’s going to be.”

Campaign Agenda

The deduction proposal was part of Republicans’ 2009 alternative to the Democrats’ economic stimulus, and in 2010 it became part of House Republicans’ campaign agenda. The House has passed other parts of that plan, including bills to repeal the 2010 health-care law and require congressional approval of major regulations.

The small-business tax cut hasn’t advanced. Republicans want to pass it before the April 17 tax filing deadline for individuals.

“That’s what we want to do to make it easier for these small businesses to start up,” Cantor said Feb. 19 on “Fox News Sunday.”

The proposal would be a giveaway to people who make tens of millions of dollars a year, said Bob McIntyre, director of Citizens for Tax Justice.

“They’re just trying to cut taxes for people with a lot of money,” said McIntyre, whose Washington-based group favors higher taxes on top earners and corporations. “That’s what they always do. That’s what they are.”

Contributions to Cantor

In the 2012 election cycle, Cantor has received more than $1 million in campaign contributions from the finance, insurance and real estate industries, the second-most of sitting House members, according to the Center for Responsive Politics, a Washington group that tracks political spending.

A broader version of the tax cut would be welcome, said Andrew Goldberg, managing director of government relations and outreach for the American Institute of Architects. In the previous version of the measure, architects wouldn’t have been eligible.

“Anything that provides some relief, especially as things are struggling to get back to a good point, is something worthwhile,” Goldberg said. “If one of the goals of this process is really to create jobs and help small business create jobs, then there are few better job creators than the design and construction industry.”

U.S. Tax Code

The previous bill, sponsored by Cantor and Camp, prohibited some industries and businesses from qualifying for the tax break by referencing other sections of the U.S. tax code that had similar restrictions.

The list of excluded businesses included golf courses, massage parlors, gambling operations, farms, hotels, restaurants, engineering firms, accounting firms and producers of pornography.

The 500-employee threshold is used in some circumstances by the U.S. Small Business Administration. The federal government and lawmakers have multiple definitions of small business.

According to 2008 figures from the U.S. Census Bureau, of the 5.9 million companies that weren’t sole proprietorships, 18,469, or 0.3 percent, had 500 or more workers. Those larger companies employed 50.6 percent of the nation’s work force.

Och-Ziff had 434 employees as of Dec. 31, according to the fund’s website. Renaissance reports having 275 employees. In its 2011 year-end letter to investors, Paulson said it had 120 employees.

Other hedge funds, such as DE Shaw & Co. LP and Bridgewater Associates LP, report having more than 1,000 employees.

Steve Hinkson, a spokesman for the Managed Funds Association, the Washington-based trade group for the hedge fund industry, declined to comment on the plan because details aren’t available. Representatives of Och-Ziff, Paulson and Renaissance declined to comment on the proposal.

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