Small Business Investment and Growth Act

Summary: Small Business Investment and Growth Act - Amends the Internal Revenue Code to establish a maximum small business tax rate on taxable small business income for individuals, partnerships, or certain S corporations.  Describes such income as the least of:  (1) income from the active conduct of a trade or business in which the taxpayer is a material participant; (2) net earnings from self-employment; or (3) the taxpayer's share of additions to a qualified retained earnings account of such trade or business.  Allows distributions from such account to pay ordinary and necessary business expenses or to pay the tax imposed by this Act. 
Excludes from employment taxes the portion of taxable small business income in excess of $135,000.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Small Business Investment and Growth 
Act''.

SEC. 2. MAXIMUM SMALL BUSINESS TAX RATE.

    (a) In General.--Section 1 of the Internal Revenue Code of 1986 
(relating to tax imposed) is amended by adding at the end the following 
new subsection:
    ``(i) Maximum Small Business Tax Rate.--
            ``(1) In general.--Except as provided in paragraph (4), if 
        a taxpayer has taxable small business income for any taxable 
        year to which this subsection applies, then the tax imposed by 
        this section shall not exceed the sum of--
                    ``(A) a tax computed at the rates and in the same 
                manner as if this subsection had not been enacted on 
                the greater of--
                            ``(i) taxable income reduced by the amount 
                        of taxable small business income, or
                            ``(ii) the amount of taxable income taxed 
                        at a rate below 31 percent, plus
                    ``(B) a tax of 31 percent of the amount of taxable 
                income in excess of the amount determined under 
                paragraph (1).
            ``(2) Taxable small business income.--For purposes of this 
        subsection, the term `taxable small business income' means, 
        with respect to any taxable year, the least of--
                    ``(A) the taxable income of the taxpayer for such 
                year attributable to the active conduct of any trade or 
                business of an eligible small business in which the 
                taxpayer materially participates (within the meaning of 
                section 469(h) (other than paragraph (4))),
                    ``(B) the net earnings from self-employment (within 
                the meaning of section 1402(a), applied without dollar 
                limitation) of the taxpayer for such year attributable 
                to the active conduct of such trade or business, or
                    ``(C) the taxpayer's share of additions for such 
                taxable year to the qualified retained earnings account 
                of such trade or business.
        For purposes of determining net earnings from self-employment 
        under subparagraph (B), an S corporation shall be treated as if 
        it were a partnership.
            ``(3) Qualified retained earnings account.--For purposes of 
        this subsection:
                    ``(A) In general.--The term `qualified retained 
                earnings account' means an account established by a 
                trade or business--
                            ``(i) which is designated as a qualified 
                        retained earnings account for purposes of this 
                        subsection,
                            ``(ii) additions to which may only be made 
                        in cash,
                            ``(iii) distributions from which may only 
                        consist of qualified distributions, and
                            ``(iv) any earnings on which are not 
                        allocated to the account.
                    ``(B) Qualified distributions.--For purposes of 
                subparagraph (A), distributions from a qualified 
                retained earnings account shall be treated as qualified 
                distributions if used--
                            ``(i) to pay ordinary and necessary 
                        expenses paid or incurred in carrying on the 
                        trade or business of the eligible small 
                        business to which the account relates, or
                            ``(ii) to pay the tax imposed under this 
                        subtitle on amounts in the account.
            ``(4) Additional tax on nonqualified distributions.--
                    ``(A) In general.--If--
                            ``(i) a distribution other than a qualified 
                        distribution is made from a qualified retained 
                        earnings account, and
                            ``(ii) such distribution is made from 
                        additions to the account for a taxable year 
                        with respect to which paragraph (1) applied to 
                        the taxpayer by reason of such additions,
                then the tax imposed by this section for the taxable 
                year of the taxpayer with or within which the taxable 
                year of the eligible small business in which the 
                distribution was made ends shall be increased by the 
                amount determined under subparagraph (B).
                    ``(B) Amount of additional tax.--The amount of tax 
                determined under this subparagraph is an amount equal 
                to the sum of--
                            ``(i) the product of the taxpayer's pro 
                        rata share of the distribution described in 
                        subparagraph (A)(i) and the number of 
                        percentage points (and fractions thereof) by 
                        which the highest rate of tax in effect under 
                        this section for the taxpayer's taxable year 
                        exceeds 31 percent, plus
                            ``(ii) the product of--
                                    ``(I) the amount by which the 
                                taxpayer's pro rata share of such 
                                distribution, when added to the 
                                taxpayer's pro rata share of previous 
                                distributions from additions to the 
                                account for the same taxable year, 
                                exceeds $135,000, and
                                    ``(II) the rate of tax imposed by 
                                section 1401(b) for the taxpayer's 
                                taxable year.
                    ``(C) Order of distributions.--For purposes of this 
                paragraph, distributions shall be treated as having 
                been made from the qualified retained earnings account 
                on a first-in, first-out basis.
                    ``(D) Treatment of health insurance tax.--For 
                purposes of this title, the tax described in 
                subparagraph (B)(ii) shall be treated as if it were a 
                tax imposed by section 1401(b).
            ``(5) Eligible small business.--For purposes of this 
        subsection:
                    ``(A) In general.--The term `eligible small 
                business' means, with respect to any taxable year, a 
                sole proprietorship, partnership, or S corporation 
                which is a small business concern (within the meaning 
                of section 3(a) of the Small Business Act) as of the 
                beginning of the taxable year.
                    ``(B) Election to use 3 preceding years.--If the 
                determination under subparagraph (A) is made on the 
                basis of number of employees or gross receipts, the 
                taxpayer may elect to have the determination made on 
                the basis of the average number of employees or the 
                average gross receipts of the taxpayer for the 3 
                taxable years preceding the taxable year.
            ``(6) Years to which subsection applies.--This subsection 
        shall apply to any taxable year if the highest rate of tax set 
        forth in subsection (a), (b), (c), (d), or (e) (whichever 
        applies) for the taxable year exceeds 31 percent.
            ``(7) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry out the 
        purposes of this section, including regulations preventing the 
        characterization of distributions for purposes of compensation 
        or personal use as qualified distributions under paragraph 
        (3)(B)(i).''.
    (b) Certain Taxable Small Business Income Not Subject to HI Tax.--
Section 3121(a) (defining wages) is amended--
                            (i) by striking ``or'' at the end of 
                        paragraph (20),
                            (ii) by striking the period at the end of 
                        paragraph (21) and inserting ``; or'', and
                            (iii) by adding at the end the following 
                        new paragraph:
            ``(22) the portion of any taxable small business income (as 
        defined in section 1(i)) properly allocable to the calendar 
        year which is in excess of $135,000.''.
    (c) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1992.