SECTION 1. EXCEPTION FROM PASSIVE LOSS RULES FOR INVESTMENTS IN HIGH 
              TECHNOLOGY RESEARCH SMALL BUSINESS PASS-THRU ENTITIES.

    (a) In General.--Subsection (c) of section 469 of the Internal 
Revenue Code of 1986 is amended by redesignating paragraphs (4) through 
(7) as paragraphs (5) through (8), respectively, and by inserting after 
paragraph (3) the following new paragraph:
            ``(4) High technology research activities.--
                    ``(A) In general.--The term `passive activity' 
                shall not include any qualified research activity of 
                the taxpayer carried on by a high technology research 
                small business pass-thru entity.
                    ``(B) Treatment of losses and deductions.--
                            ``(i) In general.--Losses or deductions of 
                        a taxpayer relating to qualified research 
                        activities carried on by a high technology 
                        research small business pass-thru entity shall 
                        not be treated as losses or deductions, 
                        respectively, from a passive activity except as 
                        provided in clause (ii) and subparagraph (C).
                            ``(ii) Limitation.--Clause (i) shall apply 
                        to losses and deductions of a taxpayer relating 
                        to a high technology small business pass-thru 
                        entity for a taxable year only to the extent 
                        that the aggregate losses and deductions of the 
                        taxpayer relating to qualified research 
                        activities of such entity for such taxable year 
                        do not exceed the portion of the taxpayer's 
                        adjusted basis in the taxpayer's ownership 
                        interest in such entity that is attributable to 
                        money or other property contributed--
                                    ``(I) in exchange for such 
                                ownership interest, and
                                    ``(II) specifically for use in 
                                connection with qualified research 
                                activities.
                        For purposes of the preceding sentence, the 
                        taxpayer's basis shall not include any portion 
                        of such basis which is attributable to an 
                        increase in a partner's share of the 
                        liabilities of a partnership that is considered 
                        under section 752(a) as a contribution of 
                        money.
                    ``(C) Treatment of carryovers.--Subparagraph (B)(i) 
                shall not apply to the portion of any loss or deduction 
                that is carried over under subsection (b) into a 
                taxable year other than the taxable year in which such 
                loss or deduction arose.
                    ``(D) Qualified research activity.--For purposes of 
                this paragraph, the term `qualified research activity' 
                means any activity constituting qualified research 
                (within the meaning of section 41(d)(1)(B) and taking 
                into account paragraphs (3) and (4) of section 41(d)) 
                which involves a process of experimentation.
                    ``(E) High technology research small business pass-
                thru entity.--For purposes of this paragraph, the term 
                `high technology research small business pass-thru 
                entity' means any domestic pass-thru entity for any 
                taxable year if--
                            ``(i) either--
                                    ``(I) more than 75 percent of the 
                                entity's expenditures (including 
                                salaries, rent and overhead) for such 
                                taxable year are paid or incurred in 
                                connection with qualified research 
                                (within the meaning of section 
                                41(d)(1)(B), taking into account 
                                paragraphs (3) and (4) of section 
                                41(d)) that involves a process of 
                                experimentation conducted by the 
                                entity, or
                                    ``(II) more than 50 percent of the 
                                entity's expenditures for such taxable 
                                year constitute qualified research 
                                expenses (as defined in section 41(b), 
                                but determined without regard to the 
                                phrase `65 percent of' in paragraph 
                                (3)(A) thereof),
                            ``(ii) such entity is a small business 
                        (within the meaning of section 
                        41(b)(3)(D)(iii), applied by substituting `250' 
                        for `500' in subclause (I) thereof), and
                            ``(iii) at no time during the taxable year 
                        does the entity have aggregate gross assets in 
                        excess of $150,000,000.
                    ``(F) Provisions related to aggregate gross assets 
                limitation.--For purposes of this paragraph--
                            ``(i) In general.--Except as otherwise 
                        provided in this subparagraph, the term 
                        `aggregate gross assets' has the meaning given 
                        such term in section 1202(d)(2).
                            ``(ii) Exception for certain intangibles.--
                        Any section 197 intangible (as defined in 
                        section 197(d) and determined without regard to 
                        section 197(e)) which is used directly in 
                        connection with the research referred to in 
                        subparagraph (E)(i) shall not be taken into 
                        account in determining aggregate gross assets.
                            ``(iii) Exception for certain follow-on 
                        investments.--Cash from a sale of equity 
                        interests shall not be taken into account in 
                        determining aggregate gross assets if--
                                    ``(I) the aggregate gross assets of 
                                such entity (determined immediately 
                                after such sale and without regard to 
                                this clause) do not exceed the sum of 
                                $150,000,000, plus 25 percent of the 
                                aggregate gross assets of such entity 
                                (determined immediately before such 
                                sale and without regard to this 
                                clause), and
                                    ``(II) the aggregate gross assets 
                                of such entity (determined immediately 
                                before such sale and without regard to 
                                this clause) do not exceed 
                                $150,000,000.
                        Sales of equity interests which are part of the 
                        same plan or arrangement, or which are carried 
                        out with the principal purpose of increasing 
                        the amount of cash to which this clause applies 
                        (determined without regard to this sentence), 
                        shall be treated as a single sale for purposes 
                        of this clause.
                            ``(iv) Inflation adjustment.--In the case 
                        of any taxable year beginning after 2015, the 
                        $150,000,000 amount in subparagraph (E)(iii) 
                        and subclauses (I) and (II) of clause (iii) 
                        shall each be increased by an amount equal to--
                                    ``(I) such dollar amount, 
                                multiplied by
                                    ``(II) the cost of living 
                                adjustment determined under section 
                                1(f)(3) for the calendar year in which 
                                the taxable year begins determined by 
                                substituting `calendar year 2014' for 
                                `calendar year 1992' in subparagraph 
                                (B) thereof.
                        Any increase determined under the preceding 
                        sentence shall be rounded to the nearest 
                        $100,000.
                    ``(G) Capital expenditures taken into account for 
                expenditures test.--An expenditure shall not fail to be 
                taken into account under subparagraph (E)(i) merely 
                because such expenditure is chargeable to capital 
                account.
                    ``(H) Pass-thru entity.--For purposes of this 
                paragraph, the term `pass-thru entity' means any 
                partnership, S corporation, or other entity identified 
                by the Secretary as a pass-thru entity for purposes of 
                this paragraph.
                    ``(I) Aggregation rules.--
                            ``(i) In general.--All persons treated as a 
                        single employer under subsection (a) or (b) of 
                        section 52, or subsection (m) or (o) of section 
                        414, shall be treated as a single entity for 
                        purposes of subparagraphs (E) and (F)(iii).
                            ``(ii) Limitation where entity would not 
                        qualify.--No entity shall be treated as a high 
                        technology research small business pass-thru 
                        entity unless such entity qualifies as such 
                        both with and without the application of clause 
                        (i).
                    ``(J) Activities not engaged in for profit and 
                economic substance rules.--Section 183 and the economic 
                substance rules of section 7701(o) shall not apply to 
                disallow the losses, deductions, and credits of a high 
                technology research small business pass-thru entity 
                solely as a result of losses incurred by such 
                entity.''.
    (b) Material Participation Not Required.--Paragraph (5) of section 
469(c) of the Internal Revenue Code of 1986, as redesignated by 
subsection (a), is amended by striking ``and (3)'' in the heading and 
text and inserting ``, (3), and (4)''.
    (c) Certain Research-Related Deductions and Credits of High 
Technology Research Small Business Pass-Thru Entities Allowed for 
Purposes of Determining Alternative Minimum Tax.--
            (1) Deduction for research and experimental expenditures.--
        Paragraph (2) of section 56(b) of the Internal Revenue Code of 
        1986 is amended by adding at the end the following new 
        subparagraph:
                    ``(E) Exception for high technology research small 
                business pass-thru entities.--In the case of a high 
                technology research small business pass-thru entity (as 
                defined in section 469(c)(4)), this paragraph shall not 
                apply to any amount allowable as a deduction under 
                section 174(a).''.
            (2) Allowance of certain research-related credits.--
        Subparagraph (B) of section 38(c)(4) of such Code is amended by 
        redesignating clauses (ii) through (ix) as clauses (iii) 
        through (x), respectively, and by inserting after clause (i) 
        the following new clause:
                            ``(ii) the credits of an individual 
                        taxpayer determined under sections 41 and 48D 
                        to the extent attributable to a high technology 
                        research small business pass-thru entity (as 
                        defined in section 469(c)(4)),''.
    (d) Exception to Limitation on Pass-Thru of Research Credit.--
Subsection (g) of section 41 of such Code is amended by adding at the 
end the following: ``Paragraphs (2) and (4) shall not apply with 
respect to any high technology research small business pass-thru entity 
(as defined in section 469(c)(4)).''.
    (e) Effective Date.--The amendments made by this section shall 
apply to losses and credits arising in taxable years beginning on or 
after the date of the enactment of this Act.
Output: Amends the Internal Revenue Code to exempt from the definition of "passive activity," for purposes of the passive loss tax rules, any qualified research activity carried on by a high technology research small business pass-thru entity. Defines "high technology research small business pass-thru entity" as any domestic pass-thru entity if: (1) more than 75% of the entity's expenditures are paid or incurred in connection with qualified research, or (2) more than 50% of the entity's expenditures constitute qualified research expenses. Designates a high technology research entity as a small business if such entity has 250 or fewer full-time employees and does not have aggregate gross assets in excess of $150 million.