IB 
Union Calendar No. 292 
112TH CONGRESS 
2D SESSION 
H. R. 9 
[Report No. 112–425] 
To amend the Internal Revenue Code of 1986 to provide a deduction for 
domestic business income of qualified small businesses. 
IN THE HOUSE OF REPRESENTATIVES 
MARCH 21, 2012 
Mr. CANTOR introduced the following bill; which was referred to the 
Committee on Ways and Means 
APRIL 10, 2012 
Additional sponsors: Mr. SCHILLING, Mrs. BIGGERT, Mr. FRANKS of Arizona, 
Mrs. MILLER of Michigan, Mr. REED, Mr. CAMP, Mr. MCCAUL, Mr. 
GUINTA, Mr. LATTA, Mr. GRAVES of Missouri, Mr. SCHOCK, Mrs. 
MYRICK, Mr. AKIN, Ms. GRANGER, Mr. RIVERA, Mr. GALLEGLY, Mr. 
KINZINGER of Illinois, Mr. KLINE, Mr. MICA, Mrs. NOEM, Mr. AUSTRIA, 
Mr. CANSECO, Mr. WALDEN, Mr. HARPER, Mr. ROSS of Florida, Mrs. 
BLACK, Mr. SMITH of Texas, Mr. HASTINGS of Washington, Mr. 
CRAVAACK, Mr. WITTMAN, Mr. BACHUS, Mr. POE of Texas, Mr. SCA-
LISE, Mr. SCOTT of South Carolina, Mr. DANIEL E. LUNGREN of Cali-
fornia, Mrs. CAPITO, Mr. COFFMAN of Colorado, Mr. CHABOT, Mr. 
WESTMORELAND, Mr. MCCARTHY of California, Mr. LONG, and Mr. 
OLSON 
APRIL 10, 2012 
Reported with an amendment, committed to the Committee of the Whole 
House on the State of the Union, and ordered to be printed 
[Strike out all after the enacting clause and insert the part printed in italic] 
[For text of introduced bill, see copy of bill as introduced on March 21, 2012] 
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A BILL 
To amend the Internal Revenue Code of 1986 to provide 
a deduction for domestic business income of qualified 
small businesses. 
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Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
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 chapter 
1 of the Internal Revenue Code of 1986 is amended by add-
ing 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 deduction 
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 
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‘‘(B) the sum of— 
‘‘(i) the W–2 wages of the taxpayer 
paid to individuals who are non-owner 
family 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 sub-
section (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 direct 
owner, and 
‘‘(ii) such individual would be a non- 
owner if subsections (c) and (e)(3) of section 
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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-fam-
ily attribution rules) any stock of such business 
(or, if such business is other than a corporation, 
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 busi-
ness, any direct owner of such business 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 voting 
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 prof-
its interest of such business. 
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‘‘(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 tax-
able year of such person, the sum of the amounts 
described in paragraphs (3) and (8) of section 
6051(a) paid by such person with respect to em-
ployment of employees by such person during the 
calendar year ending during such taxable year. 
‘‘(B) LIMITATION TO WAGES ATTRIBUTABLE 
TO QUALIFIED DOMESTIC BUSINESS INCOME.— 
Such term shall not include any amount which 
is not properly allocable to domestic 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)— 
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‘‘(i) such term shall not include any 
amount which is not allowed as a deduction 
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 applica-
tion 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 
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‘‘(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 PART-
NER.—For purposes of this paragraph, the term 
‘qualified service-providing partner’ means, with 
respect to any qualified domestic business tax-
able income, any partner who is a 10-percent-or- 
less direct owner and who materially partici-
pates in the trade or business to which such in-
come relates. 
‘‘(5) ACQUISITIONS
AND
DISPOSITIONS.—The 
Secretary shall provide for the application of this sub-
section in cases where the taxpayer acquires, or dis-
poses 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 domestic 
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 
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‘‘(B) the sum of— 
‘‘(i) the cost of goods sold that are allo-
cable to such receipts, and 
‘‘(ii) other expenses, losses, or deduc-
tions (other than the deduction allowed 
under this section), which are properly allo-
cable to such receipts. 
‘‘(2) DOMESTIC BUSINESS GROSS RECEIPTS.— 
‘‘(A) IN
GENERAL.—The term ‘domestic 
business gross receipts’ means the gross receipts 
of the taxpayer which are effectively connected 
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: 
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‘‘(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. 
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‘‘(2) FULL-TIME EQUIVALENT EMPLOYEES.—The 
term ‘full-time equivalent employees’ has the meaning 
given such term by subsection (d)(2) of section 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— 
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‘‘(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— 
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‘‘(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 purposes 
of this section (applied with respect to qualified do-
mestic business income in lieu of qualified production 
activities income). 
‘‘(f) REGULATIONS.—The Secretary shall prescribe 
such regulations as are necessary to carry out the purposes 
of this section, including regulations which prevent a tax-
payer 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. 
‘‘(g) APPLICATION.—Subsection (a) shall apply only 
with respect to the first taxable year of the taxpayer begin-
ning after December 31, 2011.’’. 
(b) CONFORMING AMENDMENTS.— 
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(1) Section 56(d)(1)(A) of such Code is amended 
by striking ‘‘deduction under section 199’’ both places 
it appears and inserting ‘‘deductions under sections 
199 and 200’’. 
(2) Section 56(g)(4)(C) of such Code is amended 
by adding at the end the following new clause: 
‘‘(vii) 
DEDUCTION
FOR
DOMESTIC 
BUSINESS
INCOME
OF
QUALIFIED
SMALL 
BUSINESSES.—Clause (i) shall not apply to 
any amount allowable as a deduction under 
section 200.’’. 
(3) The following provisions of such Code are 
each amended by inserting ‘‘200,’’ after ‘‘199,’’. 
(A) Section 86(b)(2)(A). 
(B) Section 135(c)(4)(A). 
(C) Section 137(b)(3)(A). 
(D) Section 219(g)(3)(A)(ii). 
(E) Section 221(b)(2)(C)(i). 
(F) Section 222(b)(2)(C)(i). 
(G) Section 246(b)(1). 
(H) Section 469(i)(3)(F)(iii). 
(4) Section 163(j)(6)(A)(i) of such Code is 
amended by striking ‘‘and’’ at the end of subclause 
(III) and by inserting after subclause (IV) the fol-
lowing new subclause: 
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‘‘(V) 
any 
deduction 
allowable 
under section 200, and’’. 
(5) Section 170(b)(2)(C) of such Code is amend-
ed by striking ‘‘and’’ at the end of clause (iv), by 
striking the period at the end of clause (v) and insert-
ing ‘‘, and’’, and by inserting after clause (v) the fol-
lowing new clause: 
‘‘(vi) section 200.’’. 
(6) Section 172(d) of such Code is amended by 
adding at the end the following new paragraph: 
‘‘(8) DOMESTIC BUSINESS INCOME OF QUALIFIED 
SMALL
BUSINESSES.—The deduction under section 
200 shall not be allowed.’’. 
(7) Section 613(a) of such Code is amended by 
striking ‘‘deduction under section 199’’ and inserting 
‘‘deductions under sections 199 and 200’’. 
(8) Section 613A(d)(1) of such Code is amended 
by redesignating subparagraphs (C), (D), and (E) as 
subparagraphs (D), (E), and (F), respectively, and by 
inserting after subparagraph (B) the following new 
subparagraph: 
‘‘(C) any deduction allowable under section 
200,’’. 
(9) Section 1402(a) of such Code is amended by 
striking ‘‘and’’ at the end of paragraph (16), by re-
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designating paragraph (17) as paragraph (18), and 
by inserting after paragraph (16) the following new 
paragraph: 
‘‘(17) the deduction provided by section 200 shall 
not be allowed; and’’. 
(c) CLERICAL AMENDMENT.—The table of sections for 
part VI of subchapter B of chapter 1 of such Code is amend-
ed by adding at the end the following new item: 
‘‘Sec. 200. Domestic business income of qualified small businesses.’’. 
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Union Calendar No. 292 
112TH CONGRESS 
2D SESSION 
H. R. 9 
[Report No. 112–425] 
A BILL 
To amend the Internal Revenue Code of 1986 to 
provide a deduction for domestic business income 
of qualified small businesses. 
APRIL 10, 2012 
Reported with an amendment, committed to the Com-
mittee of the Whole House on the State of the Union, 
and ordered to be printed 
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