SECTION 1. EXEMPTION FOR CERTAIN DISTRIBUTIONS OF SMALL BUSINESSES TO 
              EXTENT OF INCREASED WAGES.

    (a) In General.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 is amended by inserting before section 
140 the following new section:

``SEC. 139F. INCREASED-WAGE DISTRIBUTIONS OF SMALL BUSINESSES.

    ``(a) Application to Corporations.--
            ``(1) In general.--In the case of a distribution to an 
        individual from a corporation which is a small business 
        concern, gross income shall not include any increased-wage 
        exempt-dividend.
            ``(2) Increased-wage exempt-dividend.--For purposes of this 
        subsection--
                    ``(A) In general.--The term `increased-wage exempt-
                dividend' means any dividend properly designated as an 
                increased-wage exempt-dividend under subparagraph (B).
                    ``(B) Designation.--A corporation which is a small 
                business concern may designate any dividend paid by 
                such corporation as an increased-wage exempt-dividend 
                to the extent that the aggregate amount of the 
                dividends so designated for any taxable year does not 
                exceed the wage increase amount for such taxable year.
    ``(b) Application to Partnerships.--
            ``(1) In general.--In the case of a distribution to an 
        individual from a partnership which is a small business 
        concern--
                    ``(A) no gain shall be recognized on any increased-
                wage partnership distribution, and
                    ``(B) in the case of an increased-wage partnership 
                distribution with respect to which no gain is 
                recognized under section 731(a)(2), no reduction shall 
                be made to the adjusted basis to the partner of his 
                interest in the partnership under section 733(1).
            ``(2) Increased-wage partnership distribution.--For 
        purposes of this subsection--
                    ``(A) In general.--The term `increased-wage 
                partnership distribution' means any cash distribution 
                from the partnership to a partner which is properly 
                designated as an increased-wage partnership 
                distribution under subparagraph (B).
                    ``(B) Designation.--A partnership which is a small 
                business concern may designate any cash distribution as 
                an increased-wage partnership distribution to the 
                extent that the aggregate amount of the distributions 
                so designated for any taxable year does not exceed the 
                wage increase amount for such taxable year.
    ``(c) Wage Increase Amount.--For purposes of this section--
            ``(1) In general.--The term `wage increase amount' means, 
        with respect to any corporation or partnership for any taxable 
        year, the sum of--
                    ``(A) the excess (if any) of--
                            ``(i) the aggregate qualified wages paid or 
                        incurred by the corporation or partnership for 
                        such taxable year, over
                            ``(ii) the aggregate qualified wages paid 
                        or incurred by the corporation or partnership 
                        for the preceding taxable year, plus
                    ``(B) any increased-wage exempt-dividends or 
                increased-wage partnership distributions received by 
                such corporation or partnership during such taxable 
                year.
            ``(2) Qualified wages.--The term `qualified wages' has the 
        meaning which would be given such term by section 3121(a) if 
        paragraph (1) thereof were applied by treating the contribution 
        and benefit base as being equal to $50,000.
            ``(3) Aggregation rule.--All persons treated as a single 
        employer under subsection (a) or (b) of section 52 shall be 
        treated as one person for purposes of this subsection.
            ``(4) Treatment of predecessors.--Any reference in this 
        subsection to a corporation or partnership shall include a 
        reference to any predecessor of such corporation or 
        partnership.
    ``(d) Small Business Concern.--For purposes of this section, the 
term `small business concern' has the meaning given such term by 
section 3 of the Small Business Act.''.
    (b) Conforming Amendments.--
            (1) Section 1(h)(11)(B)(ii) of such Code is amended by 
        striking ``and'' at the end of subclause (II), by striking the 
        period at the end of subclause (III) and inserting ``, and'', 
        and by adding at the end the following new subclause:
                                    ``(IV) any increased-wage exempt-
                                dividend (as defined in section 
                                139F).''.
            (2) The table of sections for part III of subchapter B of 
        chapter 1 of such Code is amended by inserting before the item 
        relating to section 140 the following new item:

``Sec. 139F. Increased-wage distributions.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2012.
Output: Amends the Internal Revenue Code to exclude from gross income increased-wage exempt-dividends distributed to an individual by a corporation or a partnership which is a small business concern (as defined by the Small Business Act). Defines &quot;increased-wage exempt-dividends&quot; as dividends paid by a small business concern that do not exceed the increase in wages paid by the small business concern over wages paid in the preceding taxable year.