SECTION 1. SHORT TITLE. 
This Act may be cited as the ‘‘Small Business Tax 
Cut Act’’. 
SEC. 2. DEDUCTION FOR DOMESTIC BUSINESS INCOME OF 
QUALIFIED SMALL BUSINESSES. 
(a) IN GENERAL.—Part VI of subchapter B of chap-
ter 1 of the Internal Revenue Code of 1986 is amended 
by adding at the end the following new section: 
‘‘SEC. 200. DOMESTIC BUSINESS INCOME OF QUALIFIED 
SMALL BUSINESSES. 
‘‘(a) ALLOWANCE OF DEDUCTION.—In the case of a 
qualified small business, there shall be allowed as a deduc-
tion an amount equal to 20 percent of the lesser of— 
‘‘(1) the qualified domestic business income of 
the taxpayer for the taxable year, or 
‘‘(2) taxable income (determined without regard 
to this section) for the taxable year. 
‘‘(b) DEDUCTION
LIMITED
BASED
ON
WAGES 
PAID.— 
‘‘(1) IN GENERAL.—The amount of the deduc-
tion allowable under subsection (a) for any taxable 
year shall not exceed 50 percent of the greater of— 
‘‘(A) the W–2 wages of the taxpayer paid 
to non-owners, or 
‘‘(B) the sum of—
‘‘(i) the W–2 wages of the taxpayer 
paid to individuals who are non-owner fam-
ily members of direct owners, plus 
‘‘(ii) any W–2 wages of the taxpayer 
paid to 10-percent-or-less direct owners. 
‘‘(2) DEFINITIONS RELATED TO OWNERSHIP.— 
For purposes of this section— 
‘‘(A) NON-OWNER.—The term ‘non-owner’ 
means, with respect to any qualified small busi-
ness, any person who does not own (and is not 
considered as owning within the meaning of 
subsection (c) or (e)(3) of section 267, as the 
case may be) any stock of such business (or, if 
such business is other than a corporation, any 
capital or profits interest of such business). 
‘‘(B) NON-OWNER FAMILY MEMBERS.—An 
individual is a non-owner family member of a 
direct owner if— 
‘‘(i) such individual is family (within 
the meaning of section 267(c)(4)) of a di-
rect owner, and 
‘‘(ii) such individual would be a non- 
owner if subsections (c) and (e)(3) of sec-
tion 267 were applied without regard to 
section 267(c)(2).
‘‘(C) DIRECT
OWNER.—The term ‘direct 
owner’ means, with respect to any qualified 
small business, any person who owns (or is con-
sidered as owning under the applicable non- 
family attribution rules) any stock of such busi-
ness (or, if such business is other than a cor-
poration, any capital or profits interest of such 
business). 
‘‘(D) 10-PERCENT-OR-LESS
DIRECT
OWN-
ERS.—The 
term 
‘10-percent-or-less 
direct 
owner’ means, with respect to any qualified 
small business, any direct owner of such busi-
ness who owns (or is considered as owning 
under the applicable non-family attribution 
rules)— 
‘‘(i) in the case of a qualified small 
business which is a corporation, not more 
than 10 percent of the outstanding stock 
of the corporation or stock possessing more 
than 10 percent of the total combined vot-
ing power of all stock of the corporation, 
or 
‘‘(ii) in the case of a qualified small 
business which is not a corporation, not
more than 10 percent of the capital or 
profits interest of such business. 
‘‘(E) APPLICABLE NON-FAMILY ATTRIBU-
TION RULES.—The term ‘applicable non-family 
attribution rules’ means the attribution rules of 
subsection (c) or (e)(3) of section 267, as the 
case may be, but in each case applied without 
regard to section 267(c)(2). 
‘‘(3) W–2 WAGES.—For purposes of this sec-
tion— 
‘‘(A) 
IN
GENERAL.—The 
term 
‘W–2 
wages’ means, with respect to any person for 
any taxable year of such person, the sum of the 
amounts described in paragraphs (3) and (8) of 
section 6051(a) paid by such person with re-
spect to employment of employees by such per-
son during the calendar year ending during 
such taxable year. 
‘‘(B) LIMITATION
TO
WAGES
ATTRIB-
UTABLE TO QUALIFIED DOMESTIC BUSINESS IN-
COME.—Such term shall not include any 
amount which is not properly allocable to do-
mestic business gross receipts for purposes of 
subsection (c)(1).
‘‘(C) OTHER REQUIREMENTS.—Except in 
the case of amounts treated as W–2 wages 
under paragraph (4)— 
‘‘(i) such term shall not include any 
amount which is not allowed as a deduc-
tion under section 162 for the taxable 
year, and 
‘‘(ii) such term shall not include any 
amount which is not properly included in a 
return filed with the Social Security Ad-
ministration on or before the 60th day 
after the due date (including extensions) 
for such return. 
‘‘(4) CERTAIN
PARTNERSHIP
DISTRIBUTIONS 
TREATED AS W–2 WAGES.— 
‘‘(A) IN GENERAL.—In the case of a quali-
fied small business which is a partnership and 
elects the application of this paragraph for the 
taxable year— 
‘‘(i) the qualified domestic business 
taxable income of such partnership for 
such taxable year (determined after the ap-
plication of clause (ii)) which is allocable 
under rules similar to the rules of section 
199(d)(1)(A)(ii) to each qualified service-
providing partner shall be treated for pur-
poses of this section as W–2 wages paid 
during such taxable year to such partner 
as an employee, and 
‘‘(ii) the domestic business gross re-
ceipts of such partnership for such taxable 
year shall be reduced by the amount so 
treated. 
‘‘(B) 
QUALIFIED
SERVICE-PROVIDING 
PARTNER.—For purposes of this paragraph, the 
term 
‘qualified 
service-providing 
partner’ 
means, with respect to any qualified domestic 
business taxable income, any partner who is a 
10-percent-or-less direct owner and who materi-
ally participates in the trade or business to 
which such income relates. 
‘‘(5) ACQUISITIONS
AND
DISPOSITIONS.—The 
Secretary shall provide for the application of this 
subsection in cases where the taxpayer acquires, or 
disposes of, the major portion of a trade or business 
or the major portion of a separate unit of a trade 
or business during the taxable year. 
‘‘(c) QUALIFIED DOMESTIC BUSINESS INCOME.—For 
purposes of this section—
‘‘(1) IN GENERAL.—The term ‘qualified domes-
tic business income’ for any taxable year means an 
amount equal to the excess (if any) of— 
‘‘(A) the taxpayer’s domestic business 
gross receipts for such taxable year, over 
‘‘(B) the sum of— 
‘‘(i) the cost of goods sold that are al-
locable to such receipts, and 
‘‘(ii) other expenses, losses, or deduc-
tions (other than the deduction allowed 
under this section), which are properly al-
locable to such receipts. 
‘‘(2) DOMESTIC BUSINESS GROSS RECEIPTS.— 
‘‘(A) IN
GENERAL.—The term ‘domestic 
business gross receipts’ means the gross re-
ceipts of the taxpayer which are effectively con-
nected with the conduct of a trade or business 
within the United States within the meaning of 
section 864(c) but determined— 
‘‘(i) without regard to paragraphs (3), 
(4), and (5) thereof, and 
‘‘(ii) by substituting ‘qualified small 
business (within the meaning of section 
200)’ for ‘nonresident alien individual or a
foreign corporation’ each place it appears 
therein. 
‘‘(B) EXCEPTIONS.—For purposes of para-
graph (1), domestic business gross receipts 
shall not include any of the following: 
‘‘(i) Gross receipts derived from the 
sale or exchange of— 
‘‘(I) a capital asset, or 
‘‘(II) property used in the trade 
or business (as defined in section 
1231(b)). 
‘‘(ii) Royalties, rents, dividends, inter-
est, or annuities. 
‘‘(iii) Any amount which constitutes 
wages (as defined in section 3401). 
‘‘(3) APPLICATION OF CERTAIN RULES.—Rules 
similar to the rules of paragraphs (2) and (3) of sec-
tion 199(c) shall apply for purposes of this section 
(applied with respect to qualified domestic business 
income in lieu of qualified production activities in-
come and with respect to domestic business gross re-
ceipts in lieu of domestic production gross receipts). 
‘‘(d) QUALIFIED SMALL BUSINESS.—For purposes of 
this section—
‘‘(1) IN GENERAL.—The term ‘qualified small 
business’ means any employer engaged in a trade or 
business if such employer had fewer than 500 full- 
time equivalent employees for either calendar year 
2010 or 2011. 
‘‘(2) FULL-TIME
EQUIVALENT
EMPLOYEES.— 
The term ‘full-time equivalent employees’ has the 
meaning given such term by subsection (d)(2) of sec-
tion 45R applied— 
‘‘(A) without regard to subsection (d)(5) of 
such section, 
‘‘(B) with regard to subsection (e)(1) of 
such section, and 
‘‘(C) by substituting ‘calendar year’ for 
‘taxable year’ each place it appears therein. 
‘‘(3) EMPLOYERS NOT IN EXISTENCE PRIOR TO 
2012.—In the case of an employer which was not in 
existence on January 1, 2012, the determination 
under paragraph (1) shall be made with respect to 
calendar year 2012. 
‘‘(4) APPLICATION
TO
CALENDAR
YEARS
IN 
WHICH EMPLOYER IN EXISTENCE FOR PORTION OF 
CALENDAR YEAR.—In the case of any calendar year 
during which the employer comes into existence, the 
number of full-time equivalent employees determined
under paragraph (2) with respect to such calendar 
year shall be increased by multiplying the number so 
determined (without regard to this paragraph) by 
the quotient obtained by dividing— 
‘‘(A) the number of days in such calendar 
year, by 
‘‘(B) the number of days during such cal-
endar year which such employer is in existence. 
‘‘(5) SPECIAL RULES.— 
‘‘(A) AGGREGATION RULE.—For purposes 
of paragraph (1), any person treated as a single 
employer under subsection (a) or (b) of section 
52 (applied without regard to section 1563(b)) 
or subsection (m) or (o) of section 414 shall be 
treated as a single employer for purposes of this 
subsection. 
‘‘(B) PREDECESSORS.—Any reference in 
this subsection to an employer shall include a 
reference to any predecessor of such employer. 
‘‘(e) SPECIAL RULES.— 
‘‘(1) ELECTIVE APPLICATION OF DEDUCTION.— 
Except as otherwise provided by the Secretary, the 
taxpayer may elect not to take any item of income 
into account as domestic business gross receipts for 
purposes of this section.
‘‘(2) COORDINATION WITH SECTION 199.—If a 
deduction is allowed under this section with respect 
to any taxpayer for any taxable year— 
‘‘(A) any gross receipts of the taxpayer 
which are taken into account under this section 
for such taxable year shall not be taken into ac-
count under section 199 for such taxable year, 
and 
‘‘(B) the W–2 wages of the taxpayer which 
are taken into account under this section shall 
not be taken into account under section 199 for 
such taxable year. 
‘‘(3) APPLICATION OF CERTAIN RULES.—Rules 
similar to the rules of paragraphs (1), (2), (3), (4), 
(6), and (7) of section 199(d) shall apply for pur-
poses of this section (applied with respect to quali-
fied domestic business income in lieu of qualified 
production activities income). 
‘‘(f) REGULATIONS.—The Secretary shall prescribe 
such regulations as are necessary to carry out the pur-
poses of this section, including regulations which prevent 
a taxpayer which reorganizes from being treated as a 
qualified small business if such taxpayer would not have 
been treated as a qualified small business prior to such 
reorganization.