To amend the Internal Revenue Code of 1986 to provide for Small Business Protection Accounts, and for other purposes.

Summary: Small Business Protection Act of 2005 - Amends the Internal Revenue Code to allow certain small business owners a tax deduction for cash contributions to a Small Business Protection Account. Limits the amount of such deduction to 50 percent of a taxpayer's net profits.

Directs the Small Business Administration, through the Small Business Development Center Program, to assist small businesses in establishing and operating Small Business Protection Accounts.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Small Business Protection Act of 
2005''.

SEC. 2. FINDINGS.

    Congress hereby finds that--
            (1) small businesses represent more than 99 percent of all 
        employers,
            (2) the majority of private sector employees work for small 
        businesses,
            (3) more than half of all high-tech workers work for small 
        businesses,
            (4) small businesses are responsible for the majority of 
        net job creation in the United States,
            (5) more than 12 million small businesses are owned by 
        women or minorities,
            (6) small businesses face unique challenges in accessing 
        capital markets,
            (7) small businesses are exposed to more market volatility 
        than larger employers,
            (8) small businesses are hurt disproportionately by costs 
        imposed by government regulations, and
            (9) small businesses are in need of reforms to the tax code 
        that reflect these unique challenges.

SEC. 3. PURPOSES.

    The purposes of this Act are--
            (1) to provide employees salaries and benefits, and to help 
        ensure solvency of small businesses during times of recession,
            (2) to encourage the formation, growth, and survival of 
        small businesses,
            (3) to encourage opportunities for charitable giving by 
        small businesses, and
            (4) to enable small businesses to stimulate the national 
        economy through increased employment and capital generation.

SEC. 4. SMALL BUSINESS PROTECTION ACCOUNTS.

    (a) In General.--Subpart C of part II of subchapter E of chapter 1 
of the Internal Revenue Code of 1986 (relating to taxable year for 
which deductions taken) is amended by inserting after section 468B the 
following:

``SEC. 468C. SMALL BUSINESS PROTECTION ACCOUNTS.

    ``(a) Deduction Allowed.--In the case of an individual engaged in 
an eligible small business, there shall be allowed as a deduction for 
any taxable year the amount paid in cash by the taxpayer during the 
taxable year to a Small Business Protection Account.
    ``(b) Limitation.--
            ``(1) In general.--The amount which a taxpayer may pay into 
        a Small Business Protection Account for any taxable year shall 
        not exceed 50 percent of so much of the net profit of the 
        taxpayer (determined without regard to this section) which is 
        attributable (determined in the manner applicable under section 
        1301) to any trade or business.
            ``(2) Carryover of excess limitation.--If the limitation 
        under paragraph (1) for any taxable year exceeds the amount 
        paid by the taxpayer to the taxpayer's Small Business 
        Protection Account for such year, the limitation under 
        paragraph (1) for the following taxable year (determined 
        without regard to this paragraph) shall be increased by such 
        excess.
    ``(c) Eligible Small Business.--For purposes of this section, the 
term `eligible small business' means any trade or business if--
            ``(1) such trade or business (or any predecessor thereof) 
        meets the gross receipts test of section 448(c) for all prior 
        taxable years,
            ``(2) such trade or business is not a passive activity 
        (within the meaning of section 469(c)) of the taxpayer,
            ``(3) such trade or business is not a farming business (as 
        defined in section 263A(e)(4)), and
            ``(4) such trade or business has never been determined by 
        the United States Equal Employment Opportunity Commission to 
        have engaged in job discrimination.
    ``(d) Small Business Protection Account.--For purposes of this 
section--
            ``(1) In general.--The term `Small Business Protection 
        Account' means a trust created or organized in the United 
        States for the exclusive benefit of the taxpayer, but only if 
        the written governing instrument creating the trust meets the 
        following requirements:
                    ``(A) No contribution will be accepted for any 
                taxable year in excess of the amount allowed as a 
                deduction under subsection (a) for such year.
                    ``(B) The trustee is a bank (as defined in section 
                408(n)) or another person who demonstrates to the 
                satisfaction of the Secretary that the manner in which 
                such person will administer the trust will be 
                consistent with the requirements of this section.
                    ``(C) The assets of the trust consist entirely of 
                cash or of obligations which have adequate stated 
                interest (as defined in section 1274(c)(2)) and which 
                pay such interest not less often than annually.
                    ``(D) All income of the trust is distributed 
                currently to the grantor.
                    ``(E) The assets of the trust will not be 
                commingled with other property except in a common trust 
                fund or common investment fund.
            ``(2) Account taxed as grantor trust.--The grantor of a 
        Small Business Protection Account shall be treated for purposes 
        of this title as the owner of such Account and shall be subject 
        to tax thereon in accordance with subpart E of part I of 
        subchapter J of this chapter (relating to grantors and others 
        treated as substantial owners).
    ``(e) Inclusion of Amounts Distributed.--
            ``(1) In general.--Except as provided in paragraph (2), 
        there shall be includible in the gross income of the taxpayer 
        for any taxable year--
                    ``(A) any amount distributed from a Small Business 
                Protection Account of the taxpayer during such taxable 
                year, and
                    ``(B) any deemed distribution under--
                            ``(i) subsection (f)(1) (relating to 
                        deposits not distributed within 5 years),
                            ``(ii) subsection (f)(2) (relating to 
                        cessation in eligible small business), and
                            ``(iii) subparagraph (A) or (B) of 
                        subsection (f)(3) (relating to prohibited 
                        transactions and pledging account as security).
            ``(2) Exceptions.--Paragraph (1)(A) shall not apply to--
                    ``(A) any distribution to the extent attributable 
                to income of the Account, and
                    ``(B) the distribution of any contribution paid 
                during a taxable year to a Small Business Protection 
                Account to the extent that such contribution exceeds 
                the limitation applicable under subsection (b) if 
                requirements similar to the requirements of section 
                408(d)(4) are met.
        For purposes of subparagraph (A), distributions shall be 
        treated as first attributable to income and then to other 
        amounts.
    ``(f) Special Rules.--
            ``(1) Tax on deposits in account which are not distributed 
        within 5 years.--
                    ``(A) In general.--If, at the close of any taxable 
                year, there is a nonqualified balance in any Small 
                Business Protection Account--
                            ``(i) there shall be deemed distributed 
                        from such Account during such taxable year an 
                        amount equal to such balance, and
                            ``(ii) the taxpayer's tax imposed by this 
                        chapter for such taxable year shall be 
                        increased by 10 percent of such deemed 
                        distribution.
                The preceding sentence shall not apply if an amount 
                equal to such nonqualified balance is distributed from 
                such Account to the taxpayer before the due date 
                (including extensions) for filing the return of tax 
                imposed by this chapter for such year (or, if earlier, 
                the date the taxpayer files such return for such year).
                    ``(B) Nonqualified balance.--For purposes of 
                subparagraph (A), the term `nonqualified balance' means 
                any balance in the Account on the last day of the 
                taxable year which is attributable to amounts deposited 
                in such Account before the 4th preceding taxable year.
                    ``(C) Ordering rule.--For purposes of this 
                paragraph, distributions from a Small Business 
                Protection Account (other than distributions of current 
                income) shall be treated as made from deposits in the 
                order in which such deposits were made, beginning with 
                the earliest deposits.
            ``(2) Cessation in eligible business.--At the close of the 
        first disqualification period after a period for which the 
        taxpayer was engaged in an eligible small business, there shall 
        be deemed distributed from the Small Business Protection 
        Account of the taxpayer an amount equal to the balance in such 
        Account (if any) at the close of such disqualification period. 
        For purposes of the preceding sentence, the term 
        `disqualification period' means any period of 2 consecutive 
        taxable years for which the taxpayer is not engaged in an 
        eligible small business.
            ``(3) Certain rules to apply.--Rules similar to the 
        following rules shall apply for purposes of this section:
                    ``(A) Section 220(f)(8) (relating to treatment on 
                death).
                    ``(B) Section 408(e)(2) (relating to loss of 
                exemption of account where individual engages in 
                prohibited transaction).
                    ``(C) Section 408(e)(4) (relating to effect of 
                pledging account as security).
                    ``(D) Section 408(g) (relating to community 
                property laws).
                    ``(E) Section 408(h) (relating to custodial 
                accounts).
            ``(4) Time when payments deemed made.--For purposes of this 
        section, a taxpayer shall be deemed to have made a payment to a 
        Small Business Protection Account on the last day of a taxable 
        year if such payment is made on account of such taxable year 
        and is made on or before the due date (without regard to 
        extensions) for filing the return of tax for such taxable year.
            ``(5) Individual.--For purposes of this section, the term 
        `individual' shall not include an estate or trust.
            ``(6) Deduction not allowed for self-employment tax.--The 
        deduction allowable by reason of subsection (a) shall not be 
        taken into account in determining an individual's net earnings 
        from self-employment (within the meaning of section 1402(a)) 
        for purposes of chapter 2.
    ``(g) Reports.--The trustee of a Small Business Protection Account 
shall make such reports regarding such Account to the Secretary and to 
the person for whose benefit the Account is maintained with respect to 
contributions, distributions, and such other matters as the Secretary 
may require under regulations. The reports required by this subsection 
shall be filed at such time and in such manner and furnished to such 
persons at such time and in such manner as may be required by such 
regulations.''.
    (b) Tax on Excess Contributions.--
            (1) Subsection (a) of section 4973 of such Code (relating 
        to tax on excess contributions to certain tax-favored accounts 
        and annuities) is amended by redesignating paragraphs (4) and 
        (5) as paragraphs (5) and (6), respectively, and by inserting 
        after paragraph (3) the following:
            ``(4) a Small Business Protection Account (within the 
        meaning of section 468C(d)),''.
            (2) Section 4973 of such Code is amended by adding at the 
        end the following:
    ``(h) Excess Contributions to Small Business Protection Account.--
For purposes of this section, in the case of a Small Business 
Protection Account (within the meaning of section 468C(d)), the term 
`excess contributions' means the amount by which the amount contributed 
for the taxable year to the Account exceeds the amount which may be 
contributed to the Account under section 468C(b) for such taxable year. 
For purposes of this subsection, any contribution which is distributed 
out of the Small Business Protection Account in a distribution to which 
section 468C(e)(2)(B) applies shall be treated as an amount not 
contributed.''.
            (3) The section heading for section 4973 of such Code is 
        amended to read as follows:

``SEC. 4973. EXCESS CONTRIBUTIONS TO CERTAIN ACCOUNTS, ANNUITIES, 
              ETC.''.

            (4) The table of sections for chapter 43 of such Code is 
        amended by striking the item relating to section 4973 and 
        inserting the following:

``Sec. 4973. Excess contributions to certain accounts, annuities, 
                            etc.''.
    (c) Tax on Prohibited Transactions.--
            (1) Subsection (c) of section 4975 of such Code (relating 
        to tax on prohibited transactions) is amended by adding at the 
        end the following:
            ``(7) Special rule for small business protection account.--
        A person for whose benefit a Small Business Protection Account 
        (within the meaning of section 468C(d)) is established shall be 
        exempt from the tax imposed by this section with respect to any 
        transaction concerning such account (which would otherwise be 
        taxable under this section) if, with respect to such 
        transaction, the account ceases to be a Small Business 
        Protection Account by reason of the application of section 
        468C(f)(3)(A) to such account.''.
            (2) Paragraph (1) of section 4975(e) of such Code is 
        amended by redesignating subparagraphs (F) and (G) as 
        subparagraphs (G) and (H), respectively, and by inserting after 
        subparagraph (E) the following:
                    ``(F) a Small Business Protection Account described 
                in section 468C(d),''.
    (d) Failure to Provide Reports on Small Business Protection 
Accounts.--Paragraph (2) of section 6693(a) of such Code (relating to 
failure to provide reports on certain tax-favored accounts or 
annuities) is amended by redesignating subparagraphs (D) and (E) as 
subparagraphs (E) and (F), respectively, and by inserting after 
subparagraph (C) the following:
                    ``(D) section 468C(g) (relating to Small Business 
                Protection Accounts),''.
    (e) Clerical Amendment.--The table of sections for subpart C of 
part II of subchapter E of chapter 1 of such Code is amended by 
inserting after the item relating to section 468B the following:

``Sec. 468C. Small Business Protection Accounts.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after the date of the enactment of 
this Act.
    (g) Report.--Not later than 1 year after the date of the enactment 
of this Act, the Administrator of the Small Business Administration 
shall submit a report on the implementation and effectiveness of 
section 468C of the Internal Revenue Code of 1986 (as added by this 
section), with emphasis on the impact of Small Business Protection 
Accounts in enterprise and similar zones, to the Committee on Small 
Business of the House of Representatives and the Committee on Small 
Business and Entrepreneurship of the Senate.

SEC. 5. ADMINISTRATIVE AUTHORITY.

    The Administrator of the Small Business Administration shall 
designate the Small Business Development Center Program as the lead 
agency for assisting small businesses in establishing and operating 
Small Business Protection Accounts. The Internal Revenue Service shall 
provide such assistance to the Small Business Administration as 
necessary for the purposes of this section.