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 S corporations.  Describes such income as taxable income of the taxpayer from the active conduct of an eligible trade or small business.  Requires each S corporation to establish a qualified retained earnings account.  Allows qualified distributions from such a qualified retained earnings account to the owners to enable the S corporation shareholder to pay income taxes.  Requires regulations to establish a presumption that distributions are to pay income taxes if such distributions do not exceed 34 percent of small business income.  Provides for an additional tax on nonqualified distributions.

SECTION 1. SHORT TITLE.

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

SEC. 2. 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 of 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 34 percent, plus
                    ``(B) a tax of 34 percent of the amount of taxable 
                income in excess of the taxable income that is subject 
                to tax under subparagraph (A).
            ``(2) Taxable small business income.--For purposes of this 
        subsection, the term `taxable small business income' means, 
        with respect to any taxable year, the taxable income of the 
        taxpayer for such year attributable to the active conduct of 
        any trade or business of an eligible small business.
            ``(3) Qualified retained earnings account.--For purposes of 
        this subsection--
                    ``(A) S corporations.--Each S corporation shall 
                establish a qualified retained earnings account which 
                shall be--
                            ``(i) increased each year by the portion of 
                        the taxable income of the S corporation that is 
                        attributable to the active conduct of a trade 
                        or business by the S corporation,
                            ``(ii) decreased each year by the portion 
                        of the taxable loss of the S corporation that 
                        is attributable to such active conduct of a 
                        trade or business, and
                            ``(iii) decreased by qualified and 
                        nonqualified distributions from such S 
                        corporation to the shareholders thereof.
                    ``(B) Qualified distributions.--For purposes of 
                subparagraph (A), a distribution from a qualified 
                retained earnings account shall be treated as a 
                qualified distribution if the distribution--
                            ``(i) is made to the owners of the eligible 
                        small business, and
                            ``(ii) is made to enable the S corporation 
                        shareholder to pay income taxes (Federal, 
                        State, local) on the income of the eligible 
                        small business.
                The Secretary is authorized to promulgate regulations 
                pursuant to this subparagraph to provide rules to 
                determine the extent to which distributions by an S 
                corporation are made to enable the distributee to pay 
                its income taxes, including regulations that establish 
                a presumption that distributions are to enable the 
                distributee to pay income taxes if such distributions 
                do not exceed 34 percent of taxable small business 
                income.
                    ``(C) Distributions after taxable year.--For 
                purposes of subparagraph (B), a distribution from a 
                qualified retained earnings account within 75 days 
                after the end of a taxable year of the eligible small 
                business may be treated as a distribution made on the 
                last day of such taxable year.
            ``(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)(B) 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 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 34 
                percent.
                    ``(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 last-in, first-out basis. Distributions in excess 
                of the balance of the qualified retained earnings 
                account shall not reduce such account below zero.
            ``(5) Eligible small business.--For purposes of this 
        subsection--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), the term `eligible small business' 
                means, with respect to any taxable year, an S 
                corporation which has been designated, as of the 
                beginning of the taxable year, as a small business 
                concern (within the meaning of section 3(a) of the 
                Small Business Act) according to size standard 
                regulations published by the Small Business 
                Administration.
                    ``(B) Exclusions.--Such term shall not include--
                            ``(i) any personal service corporation (as 
                        defined in section 469(j)(2)), and
                            ``(ii) any personal holding company (as 
                        defined in section 542).
                    ``(C) 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 34 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 distributions of qualified retained 
        earnings.''
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to taxable years beginning after December 31, 1995.