Small Business Investment and Growth Act

Summary: Small Business Investment and Growth Act - Amends the Internal Revenue Code to establish, as specified, a maximum taxable S corporation tax.  Establishes a special rule for a qualified personal service corporation.  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 qualified taxable S corporation 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. S CORPORATION 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) Tax Rate on Certain S Corporation Income.--
            ``(1) In general.--Except as provided in paragraph (4), if 
        a taxpayer has taxable S corporation 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 qualified 
                        taxable S corporation income, or
                            ``(ii) the amount of taxable income taxed 
                        at a rate below 36 percent, plus
                    ``(B) a tax of 34 percent of qualified taxable S 
                corporation income in excess of the taxable income that 
                is subject to tax under subparagraph (A).
            ``(2) Taxable s corporation income.--For purposes of this 
        subsection--
                    ``(A) Qualified taxable s corporation income.--The 
                term `qualified taxable S corporation income' means 
                taxable S corporation income only to the extent such 
                income does not exceed $5,000,000.
                    ``(B) Special rule for qualified personal service 
                corporation.--
                            ``(i) In general.--In the case of a 
                        qualified personal service corporation, taxable 
                        S corporation income taken into account under 
                        subparagraph (A) may not exceed the excess of--
                                    ``(I) capital expenditures during 
                                the taxable year and the 2 prior 
                                taxable years, over
                                    ``(II) the amount of capital 
                                expenditures taken into account under 
                                subclause (I) for 2 prior taxable 
                                years.
                            ``(ii) Ordering rule.--For purposes of 
                        clause (i), capital expenditures shall be used 
                        in the order in which such expenditures are 
                        made, beginning with the earliest year.
                    ``(C) Taxable s corporation income.--The term 
                `taxable S corporation 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 S corporation.
                    ``(D) Eligible s corporation.--The term `eligible S 
                corporation' means an S corporation, except that such 
                term does not include--
                            ``(i) a personal service corporation as 
                        defined in section 469(j)(2), other than a 
                        qualified personal service corporation, and
                            ``(ii) a personal holding company (as 
                        defined in section 542).
                    ``(E) Qualified personal service corporation 
                defined.--The term `qualified personal service 
                corporation' has the meaning given such term in section 
                448(d)(2).
            ``(3) Qualified retained earnings account.--For purposes of 
        this subsection--
                    ``(A) In general.--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 
                        S corporation, and
                            ``(ii) is made to enable the S corporation 
                        shareholder to pay income taxes (Federal, 
                        State, local) on the income of the eligible S 
                        corporation.
                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 qualified taxable S 
                corporation 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 S 
                corporation 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 S corporation 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 applicable to the 
                taxpayer 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) 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.
            ``(6) 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, 1997.