II

103D CONGRESS

2D SESSION S. 2030

To amend the Internal Revenue Code of 1986 to limit the tax rate for

certain small businesses, and for other purposes.

IN THE SENATE OF THE UNITED STATES

APRIL 19 (legislative day, APRIL 11), 1994

Mr. ROTH (for himself, Mr. WALLOP, and Mr. PRESSLER) introduced the

following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to limit the

tax rate for certain small businesses, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Small Business Invest5 ment and Growth Act’’.

6 SEC. 2. MAXIMUM SMALL BUSINESS TAX RATE.

7 (a) IN GENERAL.—Section 1 of the Internal Revenue

8 Code of 1986 (relating to tax imposed) is amended by add9 ing at the end the following new subsection:

10 ‘‘(i) MAXIMUM SMALL BUSINESS TAX RATE.—
2

•S 2030 IS

1 ‘‘(1) IN GENERAL.—Except as provided in para2 graph (4), if a taxpayer has taxable small business

3 income for any taxable year to which this subsection

4 applies, then the tax imposed by this section shall

5 not exceed the sum of—

6 ‘‘(A) a tax computed at the rates and in

7 the same manner as if this subsection had not

8 been enacted on the greater of—

9 ‘‘(i) taxable income reduced by the

10 amount of taxable small business income,

11 or

12 ‘‘(ii) the amount of taxable income

13 taxed at a rate below 31 percent, plus

14 ‘‘(B) a tax of 31 percent of the amount of

15 taxable income in excess of the amount deter16 mined under paragraph (1).

17 ‘‘(2) TAXABLE SMALL BUSINESS INCOME.—For

18 purposes of this subsection, the term ‘taxable small

19 business income’ means, with respect to any taxable

20 year, the least of—

21 ‘‘(A) the taxable income of the taxpayer

22 for such year attributable to the active conduct

23 of any trade or business of an eligible small

24 business in which the taxpayer materially par-
3

•S 2030 IS

1 ticipates (within the meaning of section 469(h)

2 (other than paragraph (4))),

3 ‘‘(B) the net earnings from self-employ4 ment (within the meaning of section 1402(a),

5 applied without dollar limitation) of the tax6 payer for such year attributable to the active

7 conduct of such trade or business, or

8 ‘‘(C) the taxpayer’s share of additions for

9 such taxable year to the qualified retained earn10 ings account of such trade or business.

11 For purposes of determining net earnings from self12 employment under subparagraph (B), an S corpora13 tion shall be treated as if it were a partnership.

14 ‘‘(3) QUALIFIED RETAINED EARNINGS AC15 COUNT.—For purposes of this subsection:

16 ‘‘(A) IN GENERAL.—The term ‘qualified

17 retained earnings account’ means an account

18 established by a trade or business—

19 ‘‘(i) which is designated as a qualified

20 retained earnings account for purposes of

21 this subsection,

22 ‘‘(ii) additions to which may only be

23 made in cash,

24 ‘‘(iii) distributions from which may

25 only consist of qualified distributions, and
4

•S 2030 IS

1 ‘‘(iv) any earnings on which are not

2 allocated to the account.

3 ‘‘(B) QUALIFIED DISTRIBUTIONS.—For

4 purposes of subparagraph (A), distributions

5 from a qualified retained earnings account shall

6 be treated as qualified distributions if used—

7 ‘‘(i) to pay ordinary and necessary ex8 penses paid or incurred in carrying on the

9 trade or business of the eligible small busi10 ness to which the account relates, or

11 ‘‘(ii) to pay the tax imposed under

12 this subtitle on amounts in the account.

13 ‘‘(4) ADDITIONAL TAX ON NONQUALIFIED DIS14 TRIBUTIONS.—

15 ‘‘(A) IN GENERAL.—If—

16 ‘‘(i) a distribution other than a quali17 fied distribution is made from a qualified

18 retained earnings account, and

19 ‘‘(ii) such distribution is made from

20 additions to the account for a taxable year

21 with respect to which paragraph (1) ap22 plied to the taxpayer by reason of such

23 additions,

24 then the tax imposed by this section for the tax25 able year of the taxpayer with or within which
5

•S 2030 IS

1 the taxable year of the eligible small business in

2 which the distribution was made ends shall be

3 increased by the amount determined under sub4 paragraph (B).

5 ‘‘(B) AMOUNT OF ADDITIONAL TAX.—The

6 amount of tax determined under this subpara7 graph is an amount equal to the sum of—

8 ‘‘(i) the product of the taxpayer’s pro

9 rata share of the distribution described in

10 subparagraph (A)(i) and the number of

11 percentage points (and fractions thereof)

12 by which the highest rate of tax in effect

13 under this section for the taxpayer’s tax14 able year exceeds 31 percent, plus

15 ‘‘(ii) the product of—

16 ‘‘(I) the amount by which the

17 taxpayer’s pro rata share of such dis18 tribution, when added to the tax19 payer’s pro rata share of previous dis20 tributions from additions to the ac21 count for the same taxable year, ex22 ceeds $135,000, and

23 ‘‘(II) the rate of tax imposed by

24 section 1401(b) for the taxpayer’s tax25 able year.
6

•S 2030 IS

1 ‘‘(C) ORDER OF DISTRIBUTIONS.—For

2 purposes of this paragraph, distributions shall

3 be treated as having been made from the quali4 fied retained earnings account on a first-in,

5 first-out basis.

6 ‘‘(D) TREATMENT OF HEALTH INSURANCE

7 TAX.—For purposes of this title, the tax de8 scribed in subparagraph (B)(ii) shall be treated

9 as if it were a tax imposed by section 1401(b).

10 ‘‘(5) ELIGIBLE SMALL BUSINESS.—For pur11 poses of this subsection:

12 ‘‘(A) IN GENERAL.—The term ‘eligible

13 small business’ means, with respect to any tax14 able year, a sole proprietorship, partnership, or

15 S corporation which is a small business concern

16 (within the meaning of section 3(a) of the

17 Small Business Act) as of the beginning of the

18 taxable year.

19 ‘‘(B) ELECTION TO USE 3 PRECEDING

20 YEARS.—If the determination under subpara21 graph (A) is made on the basis of number of

22 employees or gross receipts, the taxpayer may

23 elect to have the determination made on the

24 basis of the average number of employees or the
7

•S 2030 IS

1 average gross receipts of the taxpayer for the 3

2 taxable years preceding the taxable year.

3 ‘‘(6) YEARS TO WHICH SUBSECTION APPLIES.—

4 This subsection shall apply to any taxable year if the

5 highest rate of tax set forth in subsection (a), (b),

6 (c), (d), or (e) (whichever applies) for the taxable

7 year exceeds 31 percent.

8 ‘‘(7) REGULATIONS.—The Secretary shall pre9 scribe such regulations as may be necessary or ap10 propriate to carry out the purposes of this section,

11 including regulations preventing the characterization

12 of distributions for purposes of compensation or per13 sonal use as qualified distributions under paragraph

14 (3)(B)(i).’’.

15 (b) CERTAIN TAXABLE SMALL BUSINESS INCOME

16 NOT SUBJECT TO HI TAX.—Section 3121(a) (defining

17 wages) is amended—

18 (i) by striking ‘‘or’’ at the end of

19 paragraph (20),

20 (ii) by striking the period at the end

21 of paragraph (21) and inserting ‘‘; or’’,

22 and

23 (iii) by adding at the end the follow24 ing new paragraph:
8

•S 2030 IS

1 ‘‘(22) the portion of any taxable small business

2 income (as defined in section 1(i)) properly allocable

3 to the calendar year which is in excess of

4 $135,000.’’.

5 (c) EFFECTIVE DATE.—The amendment made by

6 subsection (a) shall apply to taxable years beginning after

7 December 31, 1992.

Æ