H. Rept. 112-425 - 112th Congress (2011-2012)
April 10, 2012, As Reported by the Ways and Means Committee

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House Report 112-425 - SMALL BUSINESS TAX CUT ACT




[House Report 112-425]
[From the U.S. Government Printing Office]


112th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     112-425

======================================================================



 
                       SMALL BUSINESS TAX CUT ACT

                                _______
                                

 April 10, 2012.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

            Mr. Camp, from the Committee on Ways and Means, 
                        submitted the following

                              R E P O R T

                             together with

                            DISSENTING VIEWS

                         [To accompany H.R. 9]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 9) to amend the Internal Revenue Code of 1986 to 
provide a deduction for domestic business income of qualified 
small businesses, having considered the same, report favorably 
thereon with an amendment and recommend that the bill as 
amended do pass.

                                CONTENTS

                                                                   Page
  I. Summary and Background...........................................5
 II. Explanation of the Bill..........................................6
III. Votes of the Committee..........................................16
 IV. Budget Effects of the Bill......................................18
  V. Other Matters To Be Discussed Under the Rules of the House......21
 VI. Changes in Existing Law Made by the Bill, as Reported...........26
VII. Dissenting Views................................................38

                               Amendment

    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

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 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 deduction 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
                  ``(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 business, 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 direct 
                        owner, and
                          ``(ii) such individual would be a non-owner 
                        if subsections (c) and (e)(3) of section 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 considered as owning under the 
                applicable non-family 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 owners.--The term 
                `10-percent-or-less direct owner' means, with respect 
                to any qualified small business, 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 profits 
                        interest of such business.
                  ``(E) Applicable non-family attribution 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 section--
                  ``(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 
                respect to employment 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)--
                          ``(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 Administration 
                        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 qualified 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 application 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 purposes 
                        of this section as W-2 wages paid during such 
                        taxable year to such partner as an employee, 
                        and
                          ``(ii) the domestic business gross receipts 
                        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 
                materially 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 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
                  ``(B) the sum of--
                          ``(i) the cost of goods sold that are 
                        allocable to such receipts, and
                          ``(ii) other expenses, losses, or deductions 
                        (other than the deduction allowed under this 
                        section), which are properly allocable 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 paragraph (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, interest, 
                        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 section 199(c) shall apply 
        for purposes of this section (applied with respect to qualified 
        domestic business income in lieu of qualified production 
        activities income and with respect to domestic business gross 
        receipts 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 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--
                  ``(A) the number of days in such calendar year, by
                  ``(B) the number of days during such calendar 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 account 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 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 purposes 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.
  ``(g) Application.--Subsection (a) shall apply only with respect to 
the first taxable year of the taxpayer beginning after December 31, 
2011.''.
  (b) Conforming Amendments.--
          (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 following new subclause:
                                  ``(V) any deduction allowable under 
                                section 200, and''.
          (5) Section 170(b)(2)(C) of such Code is amended by striking 
        ``and'' at the end of clause (iv), by striking the period at 
        the end of clause (v) and inserting ``, and'', and by inserting 
        after clause (v) the following 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 redesignating 
        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 amended by adding at the end 
the following new item:

``Sec. 200. Domestic business income of qualified small businesses.''.

                       I. SUMMARY AND BACKGROUND


                         A. Purpose and Summary

    The bill, H.R. 9, reported by the Committee on Ways and 
Means, provides, in the case of a qualified small business for 
the first taxable year beginning in 2012, a deduction for 20 
percent of the qualified domestic business income of the 
taxpayer for the taxable year, or taxable income for the 
taxable year, whichever is less. However, a taxpayer's 
deduction for any taxable year may not exceed 50 percent of 
certain W-2 wages of the qualified small business.

                 B. Background and Need for Legislation

    While the Committee continues to actively pursue 
comprehensive tax reform as a critical means of promoting 
economic growth and job creation, the Committee also believes 
that it is important to provide small businesses meaningful, 
immediate tax relief in order to help put more Americans back 
to work right away. With the Nation's unemployment rate having 
now remained above eight percent for more than three years, it 
is critical that Congress help struggling small businesses hire 
new employees and increase wages. By providing all qualified 
small businesses with fewer than 500 employees--regardless of 
whether they are organized as passthrough businesses (S 
corporations or partnerships), sole proprietorships, or C 
corporations--a 20-percent deduction against active business 
income, H.R. 9 would help free up additional resources allowing 
small businesses to create more jobs in communities across the 
country.

                         C. Legislative History


Background

    H.R. 9 was introduced on March 21, 2012, and was referred 
to the Committee on Ways and Means.

Committee action

    The Committee on Ways and Means marked up H.R. 9, the Small 
Business Tax Cut Act, on March 28, 2012, and ordered the bill, 
as amended, favorably reported (with a quorum being present).

Committee hearings

    The proposed 20-percent deduction for small businesses has 
been discussed at several Committee hearings during the 112th 
Congress, including at the Select Revenue Measures 
Subcommittee's March 3, 2011, hearing on ``Small Businesses and 
Tax Reform'' and at the Committee's March 7, 2012, hearing on 
``The Treatment of Closely-Held Businesses in the Context of 
Tax Reform.'' While the general context for those particular 
hearings was the need for broader comprehensive tax reform, 
discrete legislative proposals affecting small businesses--such 
as the 20-percent small business deduction embodied in H.R. 9--
were explored by Committee Members and witnesses at those 
hearings as well.

                      II. EXPLANATION OF THE BILL


 A. Twenty-Percent Deduction for Domestic Business Income of Qualified 
    Small Business (sec. 2 of the Bill and New sec. 200 of the Code)


                              PRESENT LAW

C corporations

    A C corporation\1\ is subject to Federal income tax as an 
entity separate from its shareholders. A C corporation's income 
generally is taxed when earned at the corporate level and is 
taxed again at the individual level when distributed as 
dividends\2\ to its shareholders. Corporate deductions and 
credits reduce only corporate income (and corporate income 
taxes) and are not passed directly through to shareholders.
---------------------------------------------------------------------------
    \1\A C corporation is so named because its Federal tax treatment is 
governed by subchapter C of the Internal Revenue Code of 1986, as 
amended (the ``Code'').
    \2\Distributions with respect to stock that exceed corporate 
earnings and profits are not taxed as dividend income to shareholders 
but are treated as a tax-free return of capital that reduces the 
shareholder's basis in the stock. Distributions in excess of corporate 
earnings and profits that exceed a shareholder's basis in the stock are 
treated as amounts received in exchange for the stock which, in 
general, are taxed to the shareholder at capital gains rates. Sec. 
301(c).
---------------------------------------------------------------------------

Tax rates for C corporations

    C corporations are taxed at statutory rates ranging from 15 
percent (for taxable income up to $50,000) to 35 percent (for 
taxable income over $10,000,000); the intermediate rates are 25 
percent (for taxable income above $50,000 but not exceeding 
$75,000) and 34 percent (for taxable income above $75,000 but 
not exceeding $10,000,000).\3\ The benefit of graduated rates 
below 34 percent is phased out for C corporations with taxable 
income between $100,000 and $335,000, and the benefit of the 34 
percent rate is phased out for C corporations with taxable 
income in excess of $15,000,000. C corporation long-term 
capital gains are taxed at the same rates as C corporation 
ordinary income. Thus, the maximum tax rate for C corporation 
net long-term capital gains is 35 percent.
---------------------------------------------------------------------------
    \3\Sec. 11.
---------------------------------------------------------------------------
    A C corporation is subject to an alternative minimum tax 
that is payable, in addition to all other tax liabilities, to 
the extent that it exceeds the C corporation's regular income 
tax liability. The tax is imposed at a flat rate of 20 percent 
on alternative minimum taxable income (``AMTI'') in excess of a 
$40,000 exemption amount.\4\ Certain credits that are allowed 
to offset a C corporation's regular tax liability generally are 
not allowed to offset its minimum tax liability. If a C 
corporation pays the alternative minimum tax, the amount of the 
tax paid is allowed as a credit against the regular tax in 
future years to the extent the regular tax exceeds the 
tentative minimum tax. Small C corporations meeting a gross 
receipts test are exempt from the corporate alternative minimum 
tax. Generally, a C corporation meets the gross receipts test 
if its average annual gross receipts for the prior three 
taxable years do not exceed $7.5 million.
---------------------------------------------------------------------------
    \4\The exemption amount is phased out for corporations with income 
above certain thresholds, and is completely phased out for corporations 
with alternative minimum taxable income of $310,000 or more.
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Passthrough entities

            S corporations
    An S corporation\5\ generally is not subject to corporate 
tax on its income.\6\ Instead, S corporation shareholders 
include in income their pro rata shares of the S corporation's 
items of income (including tax-exempt income), gain, loss, 
deduction, credit, and nonseparately computed income or loss, 
whether or not distributed.\7\ To be eligible to elect S 
corporation status, a corporation may not have more than 100 
shareholders and may not have more than one class of stock.\8\ 
Only individuals (other than nonresident aliens), certain tax-
exempt organizations, and certain trusts and estates are 
permitted shareholders. A corporation may elect S corporation 
status only with the consent of all its shareholders, and may 
terminate its election with the consent of shareholders holding 
more than 50 percent of the stock.\9\
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    \5\An S corporation is so named because its Federal tax treatment 
is governed by subchapter S of the Code.
    \6\Sec. 1363.
    \7\Sec. 1366.
    \8\Sec. 1361. For this purpose, a husband and wife and all members 
of a family are treated as one shareholder. Sec. 1361(c)(1).
    \9\Sec. 1362.
---------------------------------------------------------------------------
            Partnerships
    Partnerships generally are treated for Federal income tax 
purposes as passthrough entities, not subject to tax at the 
entity level.\10\ Items of income (including tax-exempt 
income), gain, loss, deduction, and credit of the partnership 
are taken into account in computing the tax of the partners 
(based on the partnership's method of accounting and regardless 
of whether the income is distributed to the partners).\11\ A 
partner's deduction for partnership losses is limited to the 
amount of the partner's adjusted basis in his or her 
partnership interest.\12\ To the extent a loss is not allowed 
due to a limitation, it generally is carried forward to the 
next year.
---------------------------------------------------------------------------
    \10\Sec. 701.
    \11\Sec. 702(a).
    \12\Sec. 704(d).
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                       TAX RATES FOR INDIVIDUALS

    U.S. individuals (citizens and residents) are taxed at 
graduated statutory rates ranging from 10 percent (for taxable 
income of up to $8,700 for single filers and up to $17,400 for 
married taxpayers filing joint returns or surviving spouses) to 
35 percent (for taxable income over $388,350) for taxable year 
2012; the intermediate rates are 15 percent, 25 percent, 28 
percent, and 33 percent.\13\ The maximum tax rate on net long-
term capital gains generally is 15 percent.\14\ Dividends 
received by an individual from domestic corporations and 
qualified foreign corporations are taxed at the same rates that 
apply to capital gains.\15\ For 2013, the statutory rates range 
from 15 percent to 39.6 percent, and the maximum tax rate on 
net long-term capital gains generally is 20 percent (other than 
collectibles or unrecaptured section 1250 property).
---------------------------------------------------------------------------
    \13\Secs. 1(a), (c) and (i).
    \14\Sec. 1(h). Net gain from the sale of collectibles is taxed at a 
maximum 28 percent rate, while certain gain from the sale or exchange 
of depreciable real estate (``unrecaptured section 1250 property'') is 
taxed at a maximum 25 percent rate. Under present law, for taxable 
years beginning after 2012, the maximum tax rate applicable to net 
long-term capital gains (other than collectibles or unrecaptured 
section 1250 property) increases from 15 percent to 20 percent.
    \15\Sec. 1(h)(11). Under present law, for taxable years beginning 
after 2012, dividends received by an individual are taxed at ordinary 
income rates.
---------------------------------------------------------------------------
    An alternative minimum tax is imposed on an individual in 
an amount by which the tentative minimum tax exceeds the 
regular income tax for the taxable year. The tentative minimum 
tax is the sum of (1) 26 percent of so much of the taxable 
excess as does not exceed $175,000 ($87,500 in the case of a 
married individual filing a separate return) and (2) 28 percent 
of the remaining taxable excess. The taxable excess is so much 
of the AMTI as exceeds the exemption amount. The maximum tax 
rates on net capital gain and dividends used in computing the 
regular tax are used in computing the tentative minimum tax. 
AMTI is the taxpayer's taxable income increased by the 
taxpayer's tax preferences and adjusted by determining the tax 
treatment of certain items in a manner that negates the 
deferral of income resulting from the regular tax treatment of 
those items.
    The exemption amounts are: (1) $45,000 in the case of 
married individuals filing a joint return and surviving 
spouses; (2) $33,750 in the case of other unmarried 
individuals; and (3) $22,500 in the case of married individuals 
filing separate returns. The exemption amounts are phased out 
by an amount equal to 25 percent of the amount by which the 
individual's AMTI exceeds (1) $150,000 in the case of married 
individuals filing a joint return and surviving spouses, (2) 
$112,500 in the case of other unmarried individuals, and (3) 
$75,000 in the case of married individuals filing separate 
returns. These amounts are not indexed for inflation.

Section 199 deduction

            In general
    Certain domestic production activities are effectively 
taxed at lower rates by virtue of a deduction equal to a 
percentage of the income from such activities.\16\ The 
deduction is equal to nine percent of the lesser of income from 
manufacturing, construction, and certain other activities 
specified in the statute (collectively, qualified production 
activities income), or taxable income.\17\ Thus, generally the 
maximum tax rate for a C corporation on its domestic production 
activities income is effectively 31.85 percent.\18\
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    \16\Sec. 199.
    \17\However, for taxpayers that have qualified income related to 
the production, refining, processing, transportation, or distribution 
of oil, gas, or any primary product thereof (collectively, ``oil 
related production activities income''), the deduction is limited to 
six percent of its oil related production activities income. Sec. 
199(d)(9).
    \18\In the case of corporate taxpayers that are members of certain 
affiliated groups, the deduction is determined by treating all members 
of such groups as a single taxpayer and the deduction is allocated 
among such members in proportion to each member's respective amount (if 
any) of qualified production activities income. Members of an expanded 
affiliated group for purposes of the provision generally include those 
corporations which would be members of an affiliated group if such 
membership were determined based on an ownership threshold of ``more 
than 50 percent'' rather than ``at least 80 percent.''
---------------------------------------------------------------------------
    However, a taxpayer's deduction under section 199 for a 
taxable year may not exceed 50 percent of the wages properly 
allocable to domestic production gross receipts paid by the 
taxpayer during the calendar year that ends in such taxable 
year.\19\
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    \19\For purposes of the provision, wages include the sum of the 
amounts of wages as defined in section 3401(a) (i.e., wages subject to 
income tax withholding) and elective deferrals that the taxpayer 
properly reports to the Social Security Administration with respect to 
the employment of employees of the taxpayer during the calendar year 
ending during the taxpayer's taxable year. Elective deferrals include 
elective deferrals as defined in section 402(g)(3), amounts deferred 
under section 457, and, for taxable years beginning after December 31, 
2005, designated roth contributions (as defined in section 402A).
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            Qualified production activities income
    In general, qualified production activities income is equal 
to domestic production gross receipts, reduced by the sum of: 
(1) the costs of goods sold that are allocable to such 
receipts;\20\ (2) other deductions, expenses, or losses that 
are directly allocable to such receipts; and (3) a proper share 
of other deductions, expenses, and losses that are not directly 
allocable to such receipts or another class of income.\21\
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    \20\For purposes of determining such costs, any item or service 
that is imported into the United States without an arm's length 
transfer price is treated as acquired by purchase, and its cost shall 
be treated as not less than its value when it entered the United 
States. A similar rule applies in determining the adjusted basis of 
leased or rented property where the lease or rental gives rise to 
domestic production gross receipts. With regard to property previously 
exported by the taxpayer for further manufacture, the increase in cost 
or adjusted basis may not exceed the difference between the value of 
the property when exported and the value of the property when re-
imported into the United States after further manufacture. Except as 
provided by the Secretary, the value of property for this purpose is 
its customs value (as defined in section 1059A(b)(1)).
    \21\See Treas. Reg. secs. 1.199-1 through 1.199-9 prescribing rules 
for the proper allocation of items of income, deduction, expense, and 
loss for purposes of determining qualified production activities 
income. Where appropriate, such rules are similar to and consistent 
with relevant present-law rules (e.g., sec. 263A, in determining the 
cost of goods sold, and sec. 861, in determining the source of such 
items). Other deductions, expenses or losses that are directly 
allocable to such receipts include, for example, selling and marketing 
expenses. A proper share of other deductions, expenses, and losses that 
are not directly allocable to such receipts or another class of income 
include, for example, general and administrative expenses allocable to 
selling and marketing expenses. In computing qualified production 
activities income, the domestic production activities deduction itself 
is not an allocable deduction.
---------------------------------------------------------------------------
            Domestic production gross receipts
    Domestic production gross receipts generally are gross 
receipts of a taxpayer that are derived from: (1) any sale, 
exchange, or other disposition, or any lease, rental, or 
license, of qualifying production property that was 
manufactured, produced, grown, or extracted by the taxpayer in 
whole or in significant part within the United States;\22\ (2) 
any sale, exchange or other disposition, or any lease, rental, 
or license, of qualified film produced by the taxpayer; (3) any 
sale, exchange, or other disposition of electricity, natural 
gas, or potable water produced by the taxpayer in the United 
States; (4) in the case of a taxpayer engaged in the active 
conduct of a construction trade or business, construction 
activities performed in the United States;\23\ or (5) in the 
case of a taxpayer engaged in the active conduct of an 
engineering or architectural services trade or business, 
engineering or architectural services performed in the United 
States for construction projects located in the United 
States.\24\
---------------------------------------------------------------------------
    \22\Domestic production gross receipts include gross receipts of a 
taxpayer derived from any sale, exchange, or other disposition of 
agricultural products with respect to which the taxpayer performs 
storage, handling, or other processing activities (other than 
transportation activities) within the United States, provided such 
products are consumed in connection with, or incorporated into, the 
manufacturing, production, growth, or extraction of qualifying 
production property (whether or not by the taxpayer).
    \23\For this purpose, construction activities include activities 
that are directly related to the erection or substantial renovation of 
residential and commercial buildings and infrastructure. Substantial 
renovation would include structural improvements, but not mere cosmetic 
changes, such as painting that is not performed in connection with 
activities that otherwise constitute substantial renovation.
    \24\With regard to the definition of ``domestic production gross 
receipts'' as it relates to construction performed in the United States 
and engineering or architectural services performed in the United 
States for construction projects in the United States, the term refers 
only to gross receipts derived from the construction of real property 
by a taxpayer engaged in the active conduct of a construction trade or 
business, or from engineering or architectural services performed with 
respect to real property by a taxpayer engaged in the active conduct of 
an engineering or architectural services trade or business.
---------------------------------------------------------------------------
    However, domestic production gross receipts do not include 
any gross receipts of the taxpayer derived from property that 
is leased, licensed, or rented by the taxpayer for use by any 
related person.\25\ Further, domestic production gross receipts 
do not include any gross receipts of the taxpayer that are 
derived from the sale of food or beverages prepared by the 
taxpayer at a retail establishment, that are derived from the 
transmission or distribution of electricity, gas, and potable 
water, or that are derived from the lease, rental, license, 
sale, exchange, or other disposition of land.\26\
---------------------------------------------------------------------------
    \26\Sec. 199(c)(4)(B).
    \25\Sec. 199(c)(7). In general, principles similar to those under 
the extraterritorial income regime apply for this purpose. See Temp. 
Treas. Reg. sec. 1.927(a)-1T(f)(2)(i). For example, this exclusion 
generally does not apply to property leased by the taxpayer to a 
related person if the property is held for sublease, or is subleased, 
by the related person to an unrelated person for the ultimate use of 
such unrelated person. Similarly, the license of computer software to a 
related person for reproduction and sale, exchange, lease, rental or 
sublicense to an unrelated person for the ultimate use of such 
unrelated person is not treated as excluded property by reason of the 
license to the related person.
---------------------------------------------------------------------------
            Qualifying production property
    Qualifying production property generally includes any 
tangible personal property, computer software, or sound 
recordings. Qualified film includes any motion picture film or 
videotape\27\ (including live or delayed television 
programming, but not including certain sexually explicit 
productions) if 50 percent or more of the total compensation 
relating to the production of such film (including compensation 
in the form of residuals and participations)\28\ constitutes 
compensation for services performed in the United States by 
actors, production personnel, directors, and producers.\29\ A 
qualified film also includes any copyrights, trademarks, or 
other intangibles with respect to such film. The wage 
limitation for qualified films includes any compensation for 
services performed in the United States by actors, production 
personnel, directors, and producers and is not restricted to W-
2 wages.\30\
---------------------------------------------------------------------------
    \27\See Treas. Reg. sec. 1.199-3(k).
    \28\To the extent that a taxpayer has included an estimate of 
participations and/or residuals in its income forecast calculation 
under section 167(g), the taxpayer must use the same estimate of 
participations and/or residuals for purposes of determining total 
compensation.
    \29\Treas. Reg. sec. 1.199-2.
    \30\Sec. 199(b)(2)(D). Effective for tax years beginning after 
December 31, 2007.
---------------------------------------------------------------------------
            Other rules
    Partnerships and S corporations.--With respect to the 
domestic production activities of a partnership or S 
corporation, the deduction under section 199 is applied at the 
partner or shareholder level.\31\ In performing the 
calculation, each partner or shareholder generally takes into 
account such person's allocable share of the components of the 
calculation (including domestic production gross receipts; the 
cost of goods sold allocable to such receipts; and other 
expenses, losses, or deductions allocable to such receipts) 
from the partnership or S corporation\32\ as well as any items 
relating to the partner's or shareholder's own qualified 
production activities, if any. Each partner or shareholder is 
treated as having W-2 wages for the taxable year in an amount 
equal to such person's allocable share of the W-2 wages of the 
partnership or S corporation for the taxable year.\33\
---------------------------------------------------------------------------
    \31\Sec. 199(d)(1)(A)(i).
    \32\Sec. 199(d)(1)(A)(ii).
    \33\Sec. 199(d)(1)(A)(iii).
---------------------------------------------------------------------------
    Trusts and estates.--In the case of a trust or estate, the 
components of the calculation are apportioned between (and 
among) the beneficiaries and the fiduciary under regulations 
prescribed by the Secretary.\34\
---------------------------------------------------------------------------
    \34\See Treas. Reg. secs. 1.199-5(d) and (e).
---------------------------------------------------------------------------
    Agricultural and horticultural cooperatives.--With regard 
to member-owned agricultural and horticultural cooperatives 
formed under Subchapter T of the Code, section 199 provides the 
same treatment of qualified production activities income 
derived from agricultural or horticultural products that are 
manufactured, produced, grown, or extracted by 
cooperatives,\35\ or that are marketed through cooperatives, as 
it provides for qualified production activities income of other 
taxpayers, that is, the cooperative may claim a deduction from 
qualified production activities income.
---------------------------------------------------------------------------
    \35\For this purpose, agricultural or horticultural products also 
include fertilizer, diesel fuel and other supplies used in agricultural 
or horticultural production that are manufactured, produced, grown, or 
extracted by the cooperative.
---------------------------------------------------------------------------
    Alternatively, section 199 provides that the amount of any 
patronage dividends or per-unit retain allocations paid to a 
member of an agricultural or horticultural cooperative (to 
which Part I of Subchapter T applies), which is allocable to 
the portion of qualified production activities income of the 
cooperative that is deductible under the provision, is 
deductible from the gross income of the member. To qualify, 
such amount must be designated by the organization as allocable 
to the deductible portion of qualified production activities 
income in a written notice mailed to its patrons not later than 
the payment period described in section 1382(d). The 
cooperative cannot reduce its income under section 1382 (e.g., 
cannot claim a dividends-paid deduction) for such amounts.
    Alternative minimum tax.--The deduction for domestic 
production activities is allowed for purposes of computing 
alternative minimum taxable income (including adjusted current 
earnings). The deduction in computing alternative minimum 
taxable income is determined by reference to the lesser of the 
qualified production activities income (as determined for the 
regular tax) or the alternative minimum taxable income (in the 
case of an individual, adjusted gross income as determined for 
the regular tax) without regard to this deduction.

                           REASONS FOR CHANGE

    The Committee believes that small businesses in the United 
States are drivers of economic growth and job creation. With 
more resources at their disposal, U.S. small businesses could 
invest more in their businesses, hire more employees, and 
increase wages. The Committee believes that reducing the 
Federal income tax burden on U.S. small businesses can serve to 
foster this type of economic and employment growth. H.R. 9, 
therefore, effectively reduces the Federal income tax rate for 
U.S. small businesses with fewer than 500 employees--regardless 
of whether they are organized as passthroughs or as C 
corporations--by providing a deduction of up to 20 percent of 
qualified domestic business income. The Committee notes that 
this definition of small business reflects the definition used 
by the Small Business Administration's Office of Advocacy. To 
provide an immediate boost to business activity as the economy 
continues to struggle, the bill is effective for the first 
taxable year of the taxpayer beginning after 2011 and would 
benefit employers with 500 or fewer employees in 2010 or 2011. 
The Committee believes it is important to establish such a 
look-back rule in order to remove any incentive for employers 
to let employees go in order to qualify for the tax benefit. 
Moreover, the bill provides an incentive for businesses to hire 
workers by relating the tax benefit to the amount of W-2 wages 
the business pays (with the amounts of its deduction 
potentially increasing as its W-2 wage base increases), and 
allows the service income of partners with small ownership 
stakes to qualify for this limit. In addition, the Committee 
recognizes the importance of family-owned and -operated 
businesses and notes that H.R. 9 contains certain rules 
designed to ensure that many such businesses would be eligible 
for this proposed benefit.

                        EXPLANATION OF PROVISION

In general

    In the case of a qualified small business, the provision 
allows a deduction for 20 percent of qualified domestic 
business income of the taxpayer for the taxable year, or 
taxable income for the taxable year, whichever is less. 
However, a taxpayer's deduction for any taxable year may not 
exceed 50 percent of certain W-2 wages of the qualified small 
business.

W-2 wages

            Limitation on deduction
    The deduction is limited to 50 percent of the greater of 
(1) W-2 wages paid by the taxpayer to non-owner employees, or 
(2) the sum of W-2 wages paid by the taxpayer to (a) employees 
who are non-owner family members of direct owners and (b) 
employees who are 10-percent-or-less direct owners.
            W-2 wages
    For purposes of the provision, W-2 wages include the sum of 
the amounts of wages as defined in section 3401(a) (i.e., wages 
subject to income tax withholding) and elective deferrals that 
the taxpayer properly reports to the Social Security 
Administration with respect to the employment of employees of 
the taxpayer during the calendar year ending during the 
taxpayer's taxable year. Elective deferrals include elective 
deferrals as defined in section 402(g)(3), amounts deferred 
under section 457, and designated Roth contributions (as 
defined in section 402A).
    W-2 wages do not, however, include any amount not properly 
allocable to domestic business gross receipts under the 
provision, nor does the term include any amount not allowed as 
a deduction under section 162 (relating to ordinary and 
necessary business expenses).\36\
---------------------------------------------------------------------------
    \36\For example, any amount paid to a household employee unrelated 
to the employer's trade or business is not allowed as a deduction under 
section 162 since the amount is not an ordinary and necessary business 
expense. However, amounts paid to employees engaged in the trade or 
business (regardless of whether such amounts are capitalized into the 
inventory or under any other provision requiring capitalization) would 
be qualifying wages for this provision, to the extent such wages are 
allocable to domestic business gross receipts.
---------------------------------------------------------------------------
    Certain partners' distributive shares of partnership items 
may be treated as W-2 wages solely for purposes of the 
provision. In the case of a qualified small business that is a 
partnership and that so elects, the portion of the qualified 
domestic business taxable income of the partnership for the 
taxable year that is allocable to each qualified service-
providing partner is treated as W-2 wages paid during that 
taxable year to an employee who is a 10-percent-or-less direct 
owner. The domestic business gross receipts of the partnership 
for the taxable year must be reduced by any amount treated as 
W-2 wages under this rule.
            Non-owner employee
    For purposes of the provision, a non-owner employee of a 
qualified small business means a person who does not own (and 
is not considered as owning within the meaning of sections 
267(c) or (e)(3), as applicable) any stock of the business or, 
if the business is not a corporation, any capital or profits 
interest of the business.
            Non-owner family member employee
    For purposes of this provision, an individual is a non-
owner family member of a direct owner if the individual is 
family (within the meaning of section 267(c)(4)\37\) of a 
direct owner and would be considered a non-owner if sections 
267(c) and (e)(3) were applied without regard to section 
267(c)(2).\38\ For example, if the son of a direct owner of a 
corporation is not, himself, a direct owner of the stock of the 
corporation, is employed by the corporation, and receives W-2 
wages from the corporation, the son is considered a non-owner 
family member of a direct owner.
---------------------------------------------------------------------------
    \37\For this purpose, family includes only brothers and sisters 
(whether by the whole or half blood), spouse, ancestors, and lineal 
descendents.
    \38\Sections 267(c) and (e)(3) provide constructive ownership rules 
for stock and passthrough entities. Section 267(c)(2) treats an 
individual as owning interests owned by the individual's family.
---------------------------------------------------------------------------
            Direct owner
    For purposes of this provision, a direct owner of a 
qualified small business is a person who owns (or is considered 
as owning under sections 267(c) or (e)(3) applied without 
regard to section 267(c)(2)) any stock of such business or, if 
the business is not a corporation, any capital or profits 
interest of the qualified small business. Thus, for example, in 
the case of tiered partnerships, for this purpose, a person who 
owns an interest in an upper-tier partnership is considered to 
own an interest in a lower-tier partnership that is a qualified 
small business.
            10-percent-or-less direct owner
    For purposes of the provision, in the case of a qualified 
small business that is a corporation, a 10-percent-or-less 
direct owner means a direct owner who owns not more than 10 
percent of the outstanding stock of the corporation or stock 
possessing not more than 10 percent of the total combined 
voting power of all stock of the corporation. In the case of a 
qualified small business that is not a corporation, a 10-
percent-or-less direct owner means a person who owns not more 
than 10 percent of the capital or profits interest in the 
qualified small business.
            Qualified service-providing partner
    For purposes of this provision, a qualified service-
providing partner is any partner who is a 10-percent-or-less 
direct owner and who materially participates in the trade or 
business to which the qualified domestic business income 
relates.

Qualified domestic business income

            In general
    Qualified domestic business income, for any taxable year, 
means the excess (if any) of (1) the taxpayer's domestic 
business gross receipts for the taxable year, over the sum of 
(2) cost of goods sold allocable to such receipts, and the 
other expenses, losses, or deductions (other than the deduction 
allowed under this provision) that are properly allocable to 
such receipts.
            Domestic business gross receipts
    Domestic business gross receipts means the gross receipts 
of the taxpayer that is a qualified small business which are 
effectively connected with the conduct of a trade or business 
within the United States within the meaning of section 864(c) 
determined without regard to paragraphs (3), (4), and (5) 
thereof and substituting ``qualified small business (within the 
meaning of section 200)'' for ``nonresident alien individual or 
a foreign corporation'' each place it appears therein. Domestic 
business gross receipts do not include (1) gross receipts 
derived from the sale or exchange of a capital asset or 
property used in the trade or business (as defined in section 
1231(b)), (2) royalties, rents, dividends, interest, or 
annuities, and (3) any amount which constitutes wages (as 
defined in section 3401).

Qualified small business

    For purposes of the provision, a qualified small business 
means an employer engaged in a trade or business if the 
employer had fewer than 500 full-time equivalent employees 
(``FTEs'')\39\ for either calendar year 2010 or 2011. For 
example, a C corporation, S corporation, partnership, or sole 
proprietorship with fewer than 500 FTEs in either calendar year 
2010 or 2011 may be a qualified small business. In the case of 
an employer not in existence on January 1, 2012, the 
determination is made with respect to calendar year 2012 rather 
than 2010 or 2011.
---------------------------------------------------------------------------
    \39\The term full-time equivalent employees for this purpose has 
the meaning given under section 45R(d)(2), without regard to section 
45R(d)(5) and (e)(1) and by applying that subsection on a calendar year 
rather than a taxable year basis. Thus, for this purpose, seasonal 
employees and self-employed individuals, including partners and sole 
proprietors, two percent shareholders of an S corporation and five 
percent owners of the employer are included in the calculation of an 
employer's FTEs.
---------------------------------------------------------------------------
    In general, an employer's FTEs are calculated by dividing 
the total hours of service for which wages were paid by the 
employer to employees during the taxable year by 2,080 
hours.\40\ This number is rounded down to the nearest whole 
number if not otherwise a whole number. Employers in existence 
for a partial calendar year annualize the number of FTEs 
calculated based on the number of calendar days the taxpayer 
was in existence during 2012.
---------------------------------------------------------------------------
    \40\For employees who work in excess of 2,080 hours during any 
taxable year, the excess is not taken into account. See sec. 
45R(d)(2)(B).
---------------------------------------------------------------------------
    Any employer that is treated as a single employer for 
purposes of section 52(a) or (b) (without regard to section 
1563(b)), relating to employees of entities under common 
control, or section 414(m) or (o), relating to employees of an 
affiliated service group, is treated as a single employer for 
purposes of determining whether an employer is a qualified 
small business.

Other rules

            Application to passthrough entities and individuals
    For purposes of this provision, rules similar to the rules 
under section 199 (described above) apply with respect to 
partnerships, S corporations, trusts or estates, or 
agricultural and horticultural cooperatives.\41\ Rules similar 
to the rules under section 199 also apply with respect to 
individuals.\42\
---------------------------------------------------------------------------
    \41\See sec. 199(d)(1) and (3).
    \42\See sec. 199(d)(2).
---------------------------------------------------------------------------
            Special rule for affiliated groups
    All members of an expanded affiliated group are treated as 
a single corporation for purposes of the provision.\43\ Rules 
similar to the rules under section 199 apply to allocate the 
deduction among the members of the expanded affiliated 
group.\44\
---------------------------------------------------------------------------
    \43\Members of an expanded affiliated group for purposes of this 
provision generally include those corporations which would be members 
of an affiliated group if such membership were determined based on an 
ownership threshold of ``more than 50 percent'' rather than ``at least 
80 percent.''
    \44\See sec. 199(d)(4).
---------------------------------------------------------------------------
            Alternative minimum tax
    The deduction for qualified domestic business income is 
allowed for purposes of computing alternative minimum taxable 
income (including adjusted current earnings). The deduction in 
computing alternative minimum taxable income is determined by 
reference to the lesser of the qualified domestic business 
income (as determined for the regular tax) or the alternative 
minimum taxable income (in the case of an individual, adjusted 
gross income as determined for the regular tax) without regard 
to this deduction.
            Coordination with section 199
    If a taxpayer is allowed a deduction under this provision 
for a taxable year, gross receipts of the taxpayer taken into 
account under this provision cannot be taken into account under 
section 199 for the taxable year. Similarly, W-2 wages taken 
into account under this provision cannot be taken into account 
under section 199 (which also has a limitation related to W-2 
wages) for the taxable year. As a result, the taxpayer may not 
benefit under this provision and under section 199 with respect 
to the same gross receipts or W-2 wages.
    A taxpayer may elect not to take into account under this 
provision any item of domestic business gross receipts. Under 
this election, for example, the taxpayer may treat an item of 
domestic business gross receipts as not taken into account 
under the provision so that the item may be taken into account 
for purposes of section 199.
            Regulations
    The Treasury Department is directed to prescribe guidance 
necessary to carry out the purposes of the provision. This 
guidance is to include rules preventing a taxpayer that 
reorganizes or changes its structure from being treated as a 
qualified small business if it would not have been so treated 
prior to the reorganization or structural change. The guidance 
is also to provide rules preventing taxpayers from obtaining a 
deduction under both section 199 and this provision based on 
the same gross receipts or W-2 wages.

                             EFFECTIVE DATE

    The provision applies only with respect to the first 
taxable year of the taxpayer beginning after December 31, 2011.

                      III. VOTES OF THE COMMITTEE

    In compliance with clause 3(b) of rule XIII of the Rules of 
the House of Representatives, the following statements are made 
concerning the votes of the Committee on Ways and Means in its 
consideration of H.R. 9, the ``Small Business Tax Cut Act.''

                    MOTION TO REPORT RECOMMENDATIONS

    The bill, H.R. 9, was ordered favorably reported as amended 
by a roll call vote of 21 yeas to 14 nays (with a quorum being 
present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Camp.......................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Herger.....................        X   ........  .........  Mr. Rangel.......  ........  ........  .........
Mr. Johnson....................        X   ........  .........  Mr. Stark........  ........        X   .........
Mr. Brady......................        X   ........  .........  Mr. McDermott....  ........        X   .........
Mr. Ryan.......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Tiberi.....................        X   ........  .........  Mr. Becerra......  ........        X   .........
Mr. Davis......................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Reichert...................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Boustany...................        X   ........  .........  Mr. Larson.......  ........        X   .........
Mr. Roskam.....................        X   ........  .........  Mr. Blumenauer...  ........        X   .........
Mr. Gerlach....................        X   ........  .........  Mr. Kind.........  ........        X   .........
Mr. Price......................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Mr. Buchanan...................        X   ........  .........  Ms. Berkley......  ........        X   .........
Mr. Smith......................        X   ........  .........  Mr. Crowley......  ........        X   .........
Mr. Schock.....................        X   ........  .........
Ms. Jenkins....................        X   ........  .........
Mr. Paulsen....................        X   ........  .........
Mr. Marchant...................  ........  ........  .........
Mr. Berg.......................        X   ........  .........
Ms. Black......................        X   ........  .........
Mr. Reed.......................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

                 VOTES ON AMENDMENTS AND OTHER MOTIONS

    The vote on the motion by Mr. Brady to table Mr. Becerra's 
challenge to the rule of the Chair was agreed to by a roll call 
vote of 20 yeas to 14 nays (with a quorum being present). The 
vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Camp.......................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Herger.....................        X   ........  .........  Mr. Rangel.......  ........  ........  .........
Mr. Johnson....................        X   ........  .........  Mr. Stark........  ........        X   .........
Mr. Brady......................        X   ........  .........  Mr. McDermott....  ........        X   .........
Mr. Ryan.......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Tiberi.....................        X   ........  .........  Mr. Becerra......  ........        X   .........
Mr. Davis......................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Reichert...................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Boustany...................        X   ........  .........  Mr. Larson.......  ........        X   .........
Mr. Roskam.....................  ........  ........  .........  Mr. Blumenauer...  ........        X   .........
Mr. Gerlach....................        X   ........  .........  Mr. Kind.........  ........        X   .........
Mr. Price......................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Mr. Buchanan...................        X   ........  .........  Ms. Berkley......  ........        X   .........
Mr. Smith......................        X   ........  .........  Mr. Crowley......  ........        X   .........
Mr. Schock.....................        X   ........  .........
Ms. Jenkins....................        X   ........  .........
Mr. Paulsen....................        X   ........  .........
Mr. Marchant...................  ........  ........  .........
Mr. Berg.......................        X   ........  .........
Ms. Black......................        X   ........  .........
Mr. Reed.......................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

    The vote on the motion by Mr. Brady to table Mr. 
McDermott's motion to appeal the ruling of the Chair was agreed 
to by a roll call vote of 21 yeas and 13 nays (with a quorum 
being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Camp.......................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Herger.....................        X   ........  .........  Mr. Rangel.......  ........  ........  .........
Mr. Johnson....................        X   ........  .........  Mr. Stark........  ........        X   .........
Mr. Brady......................        X   ........  .........  Mr. McDermott....  ........        X   .........
Mr. Ryan.......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Tiberi.....................        X   ........  .........  Mr. Becerra......  ........        X   .........
Mr. Davis......................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Reichert...................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Boustany...................        X   ........  .........  Mr. Larson.......  ........        X   .........
Mr. Roskam.....................        X   ........  .........  Mr. Blumenauer...  ........        X   .........
Mr. Gerlach....................        X   ........  .........  Mr. Kind.........  ........  ........  .........
Mr. Price......................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Mr. Buchanan...................        X   ........  .........  Ms. Berkley......  ........        X   .........
Mr. Smith......................        X   ........  .........  Mr. Crowley......  ........        X   .........
Mr. Schock.....................        X   ........  .........
Ms. Jenkins....................        X   ........  .........
Mr. Paulsen....................        X   ........  .........
Mr. Marchant...................  ........  ........  .........
Mr. Berg.......................        X   ........  .........
Ms. Black......................        X   ........  .........
Mr. Reed.......................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

    The vote on the amendment by Mr. Crowley to the amendment 
in the nature of a substitute, which would deny the deduction 
in certain circumstances, was not agreed to by a roll call vote 
of 21 nays to 14 yeas (with a quorum being present). The vote 
was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Camp.......................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Herger.....................  ........        X   .........  Mr. Rangel.......  ........  ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Stark........        X   ........  .........
Mr. Brady......................  ........        X   .........  Mr. McDermott....        X   ........  .........
Mr. Ryan.......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Tiberi.....................  ........        X   .........  Mr. Becerra......        X   ........  .........
Mr. Davis......................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Boustany...................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Mr. Gerlach....................  ........        X   .........  Mr. Kind.........        X   ........  .........
Mr. Price......................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Ms. Berkley......        X   ........  .........
Mr. Smith......................  ........        X   .........  Mr. Crowley......        X   ........  .........
Mr. Schock.....................  ........        X   .........
Ms. Jenkins....................  ........        X   .........
Mr. Paulsen....................  ........        X   .........
Mr. Marchant...................  ........  ........  .........
Mr. Berg.......................  ........        X   .........
Ms. Black......................  ........        X   .........
Mr. Reed.......................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL


               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the revenue provisions 
of the bill, H.R. 9, as reported.
    The bill is estimated to have the following effects on 
Federal budget receipts for fiscal years 2012-2022:

                                                  FISCAL YEARS
                                              [Millions of dollars]
----------------------------------------------------------------------------------------------------------------
               Item                   2012       2013       2014     2015    2016    2017    2012-17    2012-22
----------------------------------------------------------------------------------------------------------------
20-Percent Business Deduction....    -12,526    -32,714       -709  ......  ......  ......    -45,950    -45,950
----------------------------------------------------------------------------------------------------------------

B. Statement Regarding New Budget Authority and Tax Expenditures Budget 
                               Authority

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
bill involves no new or increased budget authority. The 
Committee further states that the revenue reducing income tax 
provisions involve increased tax expenditures. (See amounts in 
table in Part IV.A., above.)

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring a cost estimate 
prepared by the CBO, the following statement by CBO is 
provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, April 9, 2012.
Hon. Dave Camp,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 9, the Small 
Business Tax Cut Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The staff contact is Kalyani 
Parthasarathy.
            Sincerely,
                                              Douglas W. Elmendorf.
    Enclosure.

H.R. 9--Small Business Tax Cut Act

    H.R. 9 would amend the Internal Revenue Code to permit 
certain small businesses to deduct from their taxable income up 
to 20 percent of their qualifying domestic business income. The 
deduction would apply only to the entity's first taxable year 
that begins after December 31, 2011, and it could not exceed 50 
percent of certain wages that the firm pays or reduce the 
firm's taxable income below zero. The staff of the Joint 
Committee on Taxation (JCT) estimates that enacting H.R. 9 
would reduce revenues, thus increasing federal budget deficits 
by $46 billion over the 2012-2022 period.
    H.R. 9 would define qualifying domestic business income as 
the excess of gross receipts earned from domestic activities 
over all costs, expenses, or other deductions related to such 
receipts. A small business would be eligible for the deduction 
if it engaged in a trade or business and had fewer than 500 
full-time equivalent employees in either calendar year 2010 or 
2011. If the business was not in existence in those years, then 
the test would be applied to the firm in 2012.
    The Statutory Pay-As-You-Go Act of 2010 establishes budget 
reporting and enforcement procedures for legislation affecting 
direct spending and revenues. Enacting H.R. 9 would result in 
revenue losses in each year from 2012 to 2014. The net change 
in revenues is shown in the following table.

             CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS OF H.R. 9, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON MARCH 28, 2012
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                  By fiscal year, in millions of dollars--
                                                  ------------------------------------------------------------------------------------------------------
                                                     2012     2013    2014   2015   2016   2017   2018   2019   2020   2021   2022  2012-2017  2012-2022
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       NET INCREASE OR DECREASE (-) IN THE DEFICIT

Statutory Pay-As-You-Go Impact...................   12,526   32,714    709      0      0      0      0      0      0      0      0    45,950     45,950
--------------------------------------------------------------------------------------------------------------------------------------------------------

    JCT has determined that the bill contains no 
intergovernmental or private-sector mandates as defined in the 
Unfunded Mandates Reform Act.
    The CBO staff contact for this estimate is Kalyani 
Parthasarathy. The estimate was approved by Frank Sammartino, 
Assistant Director for Tax Analysis.

                    D. Macroeconomic Impact Analysis

    In compliance with clause 3(h)(2) of rule XIII of the Rules 
of the House of Representatives, the following statement is 
made by the Joint Committee on Taxation with respect to the 
provisions of H.R. 9: the effects of the bill on economic 
activity are so small as to be incalculable within the context 
of a model of the aggregate economy.
    The bill will potentially have small, temporary stimulative 
effects. It will temporarily increase after-tax income for the 
owners of certain firms with fewer than 500 employees, enabling 
these taxpayers to increase their purchase of goods and 
services. Because the economy is currently operating at less 
than full employment, this additional demand is likely to have 
a temporary stimulus effect, resulting in a small increase in 
real Gross Domestic Product (``GDP'') during the time the 
provision is in effect (in 2012 and for some taxpayers part of 
2013, depending on their taxable year). The size of this 
stimulus effect depends on how much of the after-tax income the 
business owners choose to spend, which is uncertain. The size 
of the tax reduction ($45.9 billion) is quite small relative to 
the size of the economy (0.003 percent of projected GDP in 
2012), which means the stimulus effect will also be quite 
small. As the tax reduction expires, the stimulus effect also 
expires.
    In addition, the bill provides an incentive to shift 
profits to the period when they are taxed at lower effective 
rates. Firms have an incentive to shift sales, and, if 
necessary, commensurate production and employment, into the 
period of the tax deduction. However, this incentive is 
partially offset by associated adjustment costs, such as 
additional overtime or hiring costs, and additional wear and 
tear on equipment. The formula for determining the amount of 
the business deduction makes it possible for firms to maximize 
the deduction bonus without increasing output. Firms might not 
need to increase their productive capacity to take full 
advantage of the tax benefits of the bill. To the extent that 
firms could increase sales and or payroll to take advantage of 
the extra deduction without increasing longer-term costs, they 
can be expected to do that. Thus, the bill is likely to result 
in some acceleration of sales into the current taxable year, 
but very little change in output over the budget period.
    The temporary nature of the bill significantly limits 
incentives it might otherwise provide for a direct increase in 
production by the affected firms. Generally, a longer-term 
reduction in taxation of business profits of the type that is 
provided for only one year in this bill would increase the rate 
of return to production, thus providing businesses with an 
incentive to increase investment and output. However, the one 
year of tax savings provided by the bill is unlikely to make 
the costs of much investment in physical capital or labor 
recruitment and training worthwhile.
    The increase in the deficit as a result of the bill may 
slightly increase long-term interest rates. In the near term, 
this effect is likely to be negligible both because the economy 
is currently operating below capacity, and because the Federal 
Reserve Board has announced an intention to keep interest rates 
low through 2014. Because the provision is temporary, there is 
no offsetting permanent increase in after-tax capital returns. 
Thus, the incentive for long-term capital investment is reduced 
in the future, putting slight downward pressure on economic 
growth.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE


          A. Committee Oversight Findings and Recommendations

    With respect to clause 3(c)(1) of rule XIII of the Rules of 
the House of Representatives (relating to oversight findings), 
the Committee advises that it was as a result of the 
Committee's review of the provisions of H.R. 9 that the 
Committee concluded that it is appropriate to report the bill, 
as amended, to the House of Representatives with the 
recommendation that the bill do pass.

        B. Statement of General Performance Goals and Objectives

    With respect to clause 3(c)(4) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that the 
bill contains no measure that authorizes funding, so no 
statement of general performance goals and objectives for which 
any measure authorizes funding is required.

              C. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the reported bill does 
not contain any Federal private sector mandates within the 
meaning of Public Law No. 104-4, the Unfunded Mandates Reform 
Act of 1995. The costs required to comply with each Federal 
private sector mandate generally are no greater than the 
aggregate estimated budget effects of the provision.
    The Committee has determined that the revenue provisions of 
the bill do not impose a Federal intergovernmental mandate on 
State, local, or tribal governments.

                D. Applicability of House Rule XXI 5(b)

    Clause 5(b) of rule XXI of the Rules of the House of 
Representatives provides, in part, that ``A bill or joint 
resolution, amendment, or conference report carrying a Federal 
income tax rate increase may not be considered as passed or 
agreed to unless so determined by a vote of not less than 
three-fifths of the Members voting, a quorum being present.'' 
The Committee has carefully reviewed the provisions of the 
bill, and states that the provisions of the bill do not involve 
any Federal income tax rate increases within the meaning of the 
rule.

                       E. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service Reform and 
Restructuring Act of 1998 (the ``IRS Reform Act'') requires the 
Joint Committee on Taxation (in consultation with the Internal 
Revenue Service and the Department of the Treasury) to provide 
a tax complexity analysis. The complexity analysis is required 
for all legislation reported by the Senate Committee on 
Finance, the House Committee on Ways and Means, or any 
committee of conference if the legislation includes a provision 
that directly or indirectly amends the Internal Revenue Code 
and has widespread applicability to individuals or small 
businesses. Pursuant to clause 3(h)(1) of rule XIII of the 
Rules of the House of Representatives, a summary description of 
that provision is provided, along with an estimate of the 
number and type of affected taxpayers, and a discussion 
regarding the relevant complexity and administrative issues.
    Following the analysis of the staff of the Joint Committee 
on Taxation are the comments of the IRS and the Treasury 
Department regarding each of the provisions included in the tax 
complexity analysis, including a discussion of the likely 
effect on IRS forms and any expected impact on the IRS.

Summary description of the provision

    In the case of a qualified small business, the provision 
allows a deduction for 20 percent of qualified domestic 
business income of the taxpayer for the taxable year, or 
taxable income for the taxable year, whichever is less. 
However, a taxpayer's deduction for any taxable year is limited 
to 50 percent of the greater of (1) W-2 wages paid by the 
taxpayer to non-owner employees, or (2) the sum of W-2 wages 
paid by the taxpayer to (a) employees who are non-owner family 
members of direct owners and (b) employees who are 10 percent-
or-less direct owners.
    For purposes of the provision, a qualified small business 
means an employer engaged in a trade or business that employed 
fewer than 500 full-time equivalent employees for either 
calendar year 2010 or 2011. Any employer treated as a single 
employer for purposes of section 52(a) or (b) (without regard 
to section 1563(b)), or section 414(m) or (o) is treated as a 
single employer for this purpose. Qualified domestic business 
income means the excess (if any) of (1) the taxpayer's gross 
receipts effectively connected with a trade or business in the 
United States, over (2) the sum of cost of goods sold, 
expenses, losses, and other deductions properly allocable to 
such receipts. For purposes of this provision, W-2 wages 
include (1) wages as defined in section 3401(a), (2) elective 
deferrals reported to the Social Security Administration, and 
(3) certain partners' distributive share of partnership items 
if the partnership so elects. A partnership can elect to treat 
partnership income allocable to partners who materially 
participate in the related trade or business, and who own 10 
percent or less of the partnership, as W-2 wages for purposes 
of this provision.
    Deductions cannot be taken under the provision and present 
law section 199 with respect to the same gross receipts. 
Similarly, W-2 wages taken into account under the provision 
cannot also be taken into account under section 199. Rules 
similar to those applicable for section 199 in the case of 
partnerships, S corporations, trusts and estates, and 
agricultural and horticultural cooperatives apply for purposes 
of the provision.
    The provision applies only with respect to the first 
taxable year of the taxpayer beginning after December 31, 2011.

Number of affected taxpayers

    It is estimated that the provision will affect more than 10 
percent of small businesses and individuals.

Discussion

    It is anticipated that small businesses that elect to apply 
the provision will need to keep additional records due to this 
provision, and that additional regulatory guidance will be 
necessary to effectively implement the provision. It is 
anticipated that the provision will result in an increase in 
disputes between small businesses and the IRS. Reasons for such 
disputes include the complexity of the provision and the 
inherent incentive for taxpayers to maximize the deduction.
    The provision likely will increase the tax preparation 
costs for most affected small businesses. Small businesses will 
have to perform additional analysis concerning whether the 
small business had no more than 500 employees and which income 
qualifies for the deduction allowed under the provision. For 
income that is determined to be eligible for the deduction 
under the provision, small businesses will be required to 
perform additional calculations to determine the amount of the 
deduction under the provision. Because the deduction is based 
upon qualified domestic business income rather than gross 
income, small businesses will be required to undertake 
calculations to determine the amounts of costs that are 
allocable to domestic business gross receipts. In some cases, 
small businesses would not have been required otherwise to 
perform these calculations but for the provision.
    The wage limitation on the deduction is likely to impact 
small businesses disproportionately. Small businesses will have 
to perform additional analysis concerning the amount of wages 
paid to non-owner employees, employees who are family members 
of direct owners, and employees who are 10 percent-or-less 
direct owners. Small businesses that are partnerships will have 
to analyze whether to elect to treat partnership income 
allocable to partners who materially participate in the related 
trade or business, and who own 10 percent or less of the 
partnership, as W-2 wages for purposes of this provision. After 
undertaking analyses to determine the amount of their potential 
deduction, many small businesses will find that such amount is 
significantly reduced or eliminated by the wage limitation. 
Small businesses may wish to increase or decrease wages paid to 
employees in various categories or hire additional employees in 
various categories in order to maximize the deduction under 
this provision. Small businesses affected by the wage 
limitation may wish to take certain gross receipts into account 
under section 199 instead of this provision.
    Due to the detailed calculations required by the provision, 
it is anticipated that the Secretary of the Treasury will have 
to create a new form for qualified small businesses to compute 
the deduction and will have to make appropriate revisions to 
several types of income tax forms and instructions. In 
addition, the Secretary of the Treasury will have to issue 
guidance to carry out the purposes of the provision, including 
rules preventing a taxpayer that reorganizes or changes its 
structure from being treated as a qualified small business if 
it would not have been so treated prior to the reorganization 
or structural change and rules preventing taxpayers from 
obtaining a deduction under both section 199 and this provision 
based on the same gross receipts or W-2 wages.

                     COMMENTS FROM IRS AND TREASURY

                        Department of the Treasury,
                                  Internal Revenue Service,
                                     Washington, DC, April 3, 2012.
Mr. Thomas A. Barthold,
Chief of Staff, Joint Committee on Taxation,
Washington, D.C.
    Dear Mr. Barthold: I am responding to your letter dated 
March 29, 2012, in which you requested a complexity analysis 
related to the deduction for domestic business income of 
qualified small businesses enacted under section 2 of the Small 
Business Tax Cut Act.
    Enclosed are the combined comments of the Internal Revenue 
Service and the Treasury Department for inclusion in the 
complexity analysis in the Conference Report on H.R. 9.
    Our comments are based on the description of the provision 
provided in your letter. The analysis does not include 
administrative cost estimates for the changes that would be 
required. Due to the short turnaround time, our comments are 
provisional and subject to change upon a more complete and in-
depth analysis of the provision. The analysis does not cover 
any other provisions of the bill.
            Sincerely,
                                                Douglas H. Shulman.
    Enclosure.

Complexity Analysis of the Conference Report on H.R. 9, Small Business 
                              Tax Cut Act


  DEDUCTION FOR DOMESTIC BUSINESS INCOME OF QUALIFIED SMALL BUSINESSES

    In the case of a qualified small business, the provision 
allows a deduction of up to 20 percent of the qualified 
domestic business income of the taxpayer for the taxable year. 
The deduction is limited to the lesser of (1) 20 percent of the 
taxpayer's taxable income or (2) 50 percent of certain W-2 
wages paid (or in some cases, deemed paid) by the taxpayer.
    For purposes of the provision, a qualified small business 
means an employer engaged in a trade or business that employed 
fewer than 500 full-time equivalent employees for either 
calendar year 2010 or 2011. Any employer treated as a single 
employer for purposes of section 52(a) or (b) (without regard 
to section 1563(b) or section 414(m) or (o) is treated as a 
single employer for this purpose. Qualified domestic business 
income means the excess (if any) of (1) the taxpayer's gross 
receipts effectively connected with a trade or business in the 
United States, over (2) the sum of cost of goods sold, 
expenses, losses, and other deductions properly allocable to 
such receipts. W-2 wages include (1) wages as defined in 
section 3401(a) and (2) elective deferrals reported to the 
Social Security Administration and, solely for purposes of the 
provision (3) certain partners' distributive share of 
partnership items if the partnership so elects. A partnership 
can elect to treat partnership income allocable to partners who 
materially participate in the related trade or business, and 
who own 10 percent or less of the partnership, as W-2 wages for 
purposes of this provision.
    Deductions cannot be taken under the provision and present 
law section 199 with respect to the same gross receipts. 
Similarly, W-2 wages taken into account under the provision 
cannot also be taken into account under section 199. Rules 
similar to those applicable for section 199, in the case of 
partnerships, S corporations, trusts and estates and 
agricultural and horticultural cooperatives, apply for purposes 
of the provision.
    The provision applies only with respect to the first 
taxable year of the taxpayer beginning after December 31, 2011.

IRS and Treasury Comments

    
 The provision applies at the individual and 
corporate level and would ``follow'' the present law section 
199 rules [Domestic Production Activities Deduction (DPAD)].
    
 The provision is, for the most part, taken in lieu 
of the section 199 DPAD (which is calculated on the current 
Form 8903).
    
 A new form 8903-A would need to be developed for 
this deduction.
    
 Where the deduction is calculated on the current 
Form 8903 and carried forward to the various individual and 
corporate tax return lines, this deduction would be calculated 
on new Form 8903-A and carried forward to the same various 
individual and corporate tax return lines.
    
 The new Form 8903-A would be complicated and would 
be similar to current Form 8903 but without the column for oil 
and gas. Form 1040, Line 35, and Form 1120, Line 25, allow for 
the DAPD and indicates the taxpayer should attach Form 8903.
    
 The reference to attaching Form 8903 on this line 
would need to be modified to indicate attachment of either Form 
8903 or new Form 8903-A.
    
 Form 6251, Alternative Minimum Tax: The form may 
need to be modified.
    
 Form 1065, Partnership Income Tax Return: The 
deduction would be applied at the partner level. The deduction 
from this provision would be a separately stated item on 
Schedule K and Schedule K-1. The instructions for both would 
need modification and a new letter code would need to be added 
to Schedule K-1.
    
 Form 1120S, S Corporation Income Tax Return: The 
deduction would be applied at the shareholder level. As such, 
applicable modifications to the instructions for Schedule K-1 
would be needed.
    
 IRS would need to communicate and educate internal 
and external stakeholders regarding the new law.
    
 New guidance in the form of a Notice or other 
vehicle as well as Regulations would be required.
    
 Limited changes would be needed to the affected 
IRM sections.
    
 IRS may need to modify existing tax systems to 
reflect this provision.
    
 If this line item is to be transcribed, additional 
resources would be needed.
    
 Policies, procedures and analysis of transcription 
results would require additional resources.
    
 Disputes between taxpayers and IRS may arise about 
the definition of a qualified small business, the type of 
employer and the type of trade or business, the FTE 
calculation, application at the partner or shareholder level, 
the definition of domestic production gross receipts, the 
definition of qualifying production property; the definitions 
of service-providing partner; non-owner employees, non-owner 
family member of direct owners; and the calculation of the 
possible 20 percent deduction.

  F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff 
                                Benefits

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill as reported contain no congressional earmarks, limited 
tax benefits, or limited tariff benefits within the meaning of 
that rule.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italic, existing law in which no change is 
proposed is shown in roman):

                     INTERNAL REVENUE CODE OF 1986


Subtitle A--Income Taxes

           *       *       *       *       *       *       *


CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *


Subchapter A--Determination of Tax Liability

           *       *       *       *       *       *       *


PART VI--ALTERNATIVE MINIMUM TAX

           *       *       *       *       *       *       *



SEC. 56. ADJUSTMENTS IN COMPUTING ALTERNATIVE MINIMUM TAXABLE INCOME.

  (a) * * *

           *       *       *       *       *       *       *

  (d) Alternative Tax Net Operating Loss Deduction Defined.--
          (1) In general.--For purposes of subsection (a)(4), 
        the term ``alternative tax net operating loss 
        deduction'' means the net operating loss deduction 
        allowable for the taxable year under section 172, 
        except that--
                  (A) the amount of such deduction shall not 
                exceed the sum of--
                          (i) the lesser of--
                                  (I) * * *
                                  (II) 90 percent of 
                                alternative minimum taxable 
                                income determined without 
                                regard to such deduction and 
                                the [deduction under section 
                                199] deductions under sections 
                                199 and 200, plus
                          (ii) the lesser of--
                                  (I) * * *
                                  (II) alternative minimum 
                                taxable income determined 
                                without regard to such 
                                deduction and the [deduction 
                                under section 199] deductions 
                                under sections 199 and 200 
                                reduced by the amount 
                                determined under clause (i), 
                                and

           *       *       *       *       *       *       *

  (g) Adjustments Based on Adjusted Current Earnings.--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Adjustments.--In determining adjusted current 
        earnings, the following adjustments shall apply:
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) Disallowance of items not deductible in 
                computing earnings and profits.--
                          (i) * * *

           *       *       *       *       *       *       *

                          (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.

           *       *       *       *       *       *       *


Subchapter B--Computation of Taxable Income

           *       *       *       *       *       *       *


PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME

           *       *       *       *       *       *       *


SEC. 86. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS.

  (a) * * *
  (b) Taxpayers to Whom Subsection (a) Applies.--
          (1) * * *
          (2) Modified adjusted gross income.--For purposes of 
        this subsection, the term ``modified adjusted gross 
        income'' means adjusted gross income--
                  (A) determined without regard to this section 
                and sections 135, 137, 199, 200, 221, 222, 911, 
                931, and 933, and

           *       *       *       *       *       *       *


PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME

           *       *       *       *       *       *       *


SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER 
                    EDUCATION TUITION AND FEES.

  (a) * * *

           *       *       *       *       *       *       *

  (c) Definitions.--For purposes of this section--
          (1) * * *

           *       *       *       *       *       *       *

          (4) Modified adjusted gross income.--The term 
        ``modified adjusted gross income'' means the adjusted 
        gross income of the taxpayer for the taxable year 
        determined--
                  (A) without regard to this section and 
                sections 137, 199, 200, 221, 222, 911, 931, and 
                933, and

           *       *       *       *       *       *       *


SEC. 137. ADOPTION ASSISTANCE PROGRAM.

  (a) * * *
  (b) Limitations.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Determination of adjusted gross income.--For 
        purposes of paragraph (2), adjusted gross income shall 
        be determined--
                  (A) without regard to this section and 
                sections 199, 200, 221, 222, 911, 931, and 933, 
                and

           *       *       *       *       *       *       *


     PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

Sec. 161. Allowance of deductions.
     * * * * * * *
Sec. 200. Domestic business income of qualified small businesses.

           *       *       *       *       *       *       *


SEC. 163. INTEREST.

  (a) * * *

           *       *       *       *       *       *       *

  (j) Limitation on Deduction for Interest on Certain 
Indebtedness.--
          (1) * * *

           *       *       *       *       *       *       *

          (6) Other definitions and special rules.--For 
        purposes of this subsection--
                  (A) Adjusted taxable income.--The term 
                ``adjusted taxable income'' means the taxable 
                income of the taxpayer--
                          (i) computed without regard to--
                                  (I) * * *

           *       *       *       *       *       *       *

                                  (III) any deduction allowable 
                                under section 199, [and]

           *       *       *       *       *       *       *

                                  (V) any deduction allowable 
                                under section 200, and

           *       *       *       *       *       *       *


SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.

  (a) * * *
  (b) Percentage Limitations.--
          (1) * * *
          (2) Corporations.--In the case of a corporation--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) Taxable income.--For purposes of this 
                paragraph, taxable income shall be computed 
                without regard to--
                          (i) * * *

           *       *       *       *       *       *       *

                          (iv) section 199, [and]
                          (v) any capital loss carryback to the 
                        taxable year under section 
                        1212(a)(1)[.], and
                          (vi) section 200.

           *       *       *       *       *       *       *


SEC. 172. NET OPERATING LOSS DEDUCTION.

  (a) * * *

           *       *       *       *       *       *       *

  (d) Modifications.--The modifications referred to in this 
section are as follows:
          (1) * * *

           *       *       *       *       *       *       *

          (8) Domestic business income of qualified small 
        businesses.--The deduction under section 200 shall not 
        be allowed.

           *       *       *       *       *       *       *


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 deduction 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
                  (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 business, 
                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 
                        direct owner, and
                          (ii) such individual would be a non-
                        owner if subsections (c) and (e)(3) of 
                        section 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 considered 
                as owning under the applicable non-family 
                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 owners.--The 
                term ``10-percent-or-less direct owner'' means, 
                with respect to any qualified small business, 
                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 profits interest of such business.
                  (E) Applicable non-family attribution 
                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 section--
                  (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 
                respect to employment 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)--
                          (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 Administration 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 qualified 
                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 
                        application 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 purposes 
                        of this section as W-2 wages paid 
                        during such taxable year to such 
                        partner as an employee, and
                          (ii) the domestic business gross 
                        receipts 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 materially 
                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 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
                  (B) the sum of--
                          (i) the cost of goods sold that are 
                        allocable to such receipts, and
                          (ii) other expenses, losses, or 
                        deductions (other than the deduction 
                        allowed under this section), which are 
                        properly allocable 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 paragraph 
                (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, 
                        interest, 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 section 199(c) 
        shall apply for purposes of this section (applied with 
        respect to qualified domestic business income in lieu 
        of qualified production activities income and with 
        respect to domestic business gross receipts 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 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--
                  (A) the number of days in such calendar year, 
                by
                  (B) the number of days during such calendar 
                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 
                account 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 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 purposes 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.
  (g) Application.--Subsection (a) shall apply only with 
respect to the first taxable year of the taxpayer beginning 
after December 31, 2011.

PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS

           *       *       *       *       *       *       *


SEC. 219. RETIREMENT SAVINGS.

  (a) * * *

           *       *       *       *       *       *       *

  (g) Limitation on Deduction for Active Participants in 
Certain Pension Plans.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Adjusted gross income; applicable dollar 
        amount.--For purposes of this subsection--
                  (A) Adjusted gross income.--Adjusted gross 
                income of any taxpayer shall be determined--
                          (i) * * *
                          (ii) without regard to sections 135, 
                        137, 199, 200, 221, 222, and 911 or the 
                        deduction allowable under this section.

           *       *       *       *       *       *       *


SEC. 221. INTEREST ON EDUCATION LOANS.

  (a) * * *
  (b) Maximum Deduction.--
          (1) * * *
          (2) Limitation based on modified adjusted gross 
        income.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) Modified adjusted gross income.--The term 
                ``modified adjusted gross income'' means 
                adjusted gross income determined--
                          (i) without regard to this section 
                        and sections 199, 200, 222, 911, 931, 
                        and 933, and

           *       *       *       *       *       *       *


SEC. 222. QUALIFIED TUITION AND RELATED EXPENSES.

  (a) * * *
  (b) Dollar Limitations.--
          (1) * * *
          (2) Applicable dollar limit.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) Adjusted gross income.--For purposes of 
                this paragraph, adjusted gross income shall be 
                determined--
                          (i) without regard to this section 
                        and sections 199, 200, 911, 931, and 
                        933, and

           *       *       *       *       *       *       *


PART VIII--SPECIAL DEDUCTIONS FOR CORPORATIONS

           *       *       *       *       *       *       *


SEC. 246. RULES APPLYING TO DEDUCTIONS FOR DIVIDENDS RECEIVED.

  (a) * * *
  (b) Limitation on Aggregate Amount of Deductions.--
          (1) General rule.--Except as provided in paragraph 
        (2), the aggregate amount of the deductions allowed by 
        sections 243(a)(1), 244(a), and subsection (a) or (b) 
        of section 245 shall not exceed the percentage 
        determined under paragraph (3) of the taxable income 
        computed without regard to the deductions allowed by 
        sections 172, 199, 200, 243(a)(1), 244(a), subsection 
        (a) or (b) of section 245, and 247, without regard to 
        any adjustment under section 1059, and without regard 
        to any capital loss carryback to the taxable year under 
        section 1212(a)(1).

           *       *       *       *       *       *       *


Subchapter E--Accounting Periods and Methods of Accounting

           *       *       *       *       *       *       *


PART II--METHODS OF ACCOUNTING

           *       *       *       *       *       *       *


Subpart C--Taxable Year for Which Deductions Taken

           *       *       *       *       *       *       *


SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.

  (a) * * *

           *       *       *       *       *       *       *

  (i) $25,000 Offset for Rental Real Estate Activities.--
          (1) * * *

           *       *       *       *       *       *       *

          (3) Phase-out of exemption.--
                  (A) * * *

           *       *       *       *       *       *       *

                  (F) Adjusted gross income.--For purposes of 
                this paragraph, adjusted gross income shall be 
                determined without regard to--
                          (i) * * *

           *       *       *       *       *       *       *

                          (iii) the amounts allowable as a 
                        deduction under sections 199, 200, 219, 
                        221, and 222, and

           *       *       *       *       *       *       *


Subchapter I--Natural Resources

           *       *       *       *       *       *       *


PART I--DEDUCTIONS

           *       *       *       *       *       *       *


SEC. 613. PERCENTAGE DEPLETION.

  (a) General Rule.--In the case of the mines, wells, and other 
natural deposits listed in subsection (b), the allowance for 
depletion under section 611 shall be the percentage, specified 
in subsection (b), of the gross income from the property 
excluding from such gross income an amount equal to any rents 
or royalties paid or incurred by the taxpayer in respect of the 
property. Such allowance shall not exceed 50 percent (100 
percent in the case of oil and gas properties) of the 
taxpayer's taxable income from the property (computed without 
allowance for depletion and without the [deduction under 
section 199] deductions under sections 199 and 200). For 
purposes of the preceding sentence, the allowable deductions 
taken into account with respect to expenses of mining in 
computing the taxable income from the property shall be 
decreased by an amount equal to so much of any gain which (1) 
is treated under section 1245 (relating to gain from 
disposition of certain depreciable property) as ordinary 
income, and (2) is properly allocable to the property. In no 
case shall the allowance for depletion under section 611 be 
less than it would be if computed without reference to this 
section.

           *       *       *       *       *       *       *


SEC. 613A. LIMITATIONS ON PERCENTAGE DEPLETION IN CASE OF OIL AND GAS 
                    WELLS.

  (a) * * *

           *       *       *       *       *       *       *

  (d) Limitations on Application of Subsection (c).--
          (1) Limitation based on taxable income.--The 
        deduction for the taxable year attributable to the 
        application of subsection (c) shall not exceed 65 
        percent of the taxpayer's taxable income for the year 
        computed without regard to--
                  (A) * * *

           *       *       *       *       *       *       *

                  (C) any deduction allowable under section 
                200,
                  [(C)] (D) any net operating loss carryback to 
                the taxable year under section 172,
                  [(D)] (E) any capital loss carryback to the 
                taxable year under section 1212, and
                  [(E)] (F) in the case of a trust, any 
                distributions to its beneficiary, except in the 
                case of any trust where any beneficiary of such 
                trust is a member of the family (as defined in 
                section 267(c)(4)) of a settlor who created 
                inter vivos and testamentary trusts for members 
                of the family and such settlor died within the 
                last six days of the fifth month in 1970, and 
                the law in the jurisdiction in which such trust 
                was created requires all or a portion of the 
                gross or net proceeds of any royalty or other 
                interest in oil, gas, or other mineral 
                representing any percentage depletion allowance 
                to be allocated to the principal of the trust.
        If an amount is disallowed as a deduction for the 
        taxable year by reason of application of the preceding 
        sentence, the disallowed amount shall be treated as an 
        amount allowable as a deduction under subsection (c) 
        for the following taxable year, subject to the 
        application of the preceding sentence to such taxable 
        year. For purposes of basis adjustments and determining 
        whether cost depletion exceeds percentage depletion 
        with respect to the production from a property, any 
        amount disallowed as a deduction on the application of 
        this paragraph shall be allocated to the respective 
        properties from which the oil or gas was produced in 
        proportion to the percentage depletion otherwise 
        allowable to such properties under subsection (c).

           *       *       *       *       *       *       *


CHAPTER 2--TAX ON SELF-EMPLOYMENT INCOME

           *       *       *       *       *       *       *


SEC. 1402. DEFINITIONS.

  (a) Net Earnings from Self-Employment.--The term ``net 
earnings from self-employment'' means the gross income derived 
by an individual from any trade or business carried on by such 
individual, less the deductions allowed by this subtitle which 
are attributable to such trade or business, plus his 
distributive share (whether or not distributed) of income or 
loss described in section 702(a)(8) from any trade or business 
carried on by a partnership of which he is a member; except 
that in computing such gross income and deductions and such 
distributive share of partnership ordinary income or loss--
          (1) * * *

           *       *       *       *       *       *       *

          (16) the deduction provided by section 199 shall not 
        be allowed; [and]
          (17) the deduction provided by section 200 shall not 
        be allowed; and
          [(17)] (18) notwithstanding the preceding provisions 
        of this subsection, each spouse's share of income or 
        loss from a qualified joint venture shall be taken into 
        account as provided in section 761(f) in determining 
        net earnings from self-employment of such spouse.

           *       *       *       *       *       *       *


                            DISSENTING VIEWS

                     The Small Business Tax Cut Act

    We support policy initiatives to stimulate economic growth 
and job creation and believe a private-public partnership 
during this time of economic recovery is essential. 
Unfortunately, H.R. 9, the so-called Small Business Tax Cut 
Act, is a broad measure affecting 99.6 percent of all 
businesses that is not targeted at job creation. The benefits 
it provides will be meted out unevenly and in an arbitrary 
manner, accruing in large measure to the wealthiest taxpayers. 
While these facts alone argue for its rejection, this temporary 
and expensive provision is also the very antithesis of tax 
reform.
    In their zeal to avoid picking ``winners and losers,'' the 
majority has embraced a massive $46 billion tax cut that is 
being offered in the name of small business but will go to 99.6 
percent of all businesses, whatever the value of their assets 
or the amount of their income and irrespective of the nature or 
function of their business. The tax break is available to 
partnerships of highly paid professionals, including lawyers 
and lobbyists. It is available to hedge fund and private equity 
fund managers. By restricting the definition of small business 
to an employee count and ignoring other relevant factors, such 
as revenues, H.R. 9 guarantees that the benefit will be 
available to a host of businesses that are anything but small. 
For example, many professional sports teams would get the tax 
break.
    H.R. 9 is not targeted at job creation. Any number of 
measures could have been included in H.R. 9 to limit the 
availability of the tax benefit to businesses that hire or 
invest in the United States. None of these measures was 
included. There is no requirement that a business receiving the 
deduction created by H.R. 9 expand employment. In fact, a 
business that reduces employment remains eligible for the 
deduction. Even worse, businesses that reduce their American 
workforce while expanding overseas still get the tax break. In 
contrast to measures such as bonus depreciation or expensing, 
there is no requirement that a business receiving the tax break 
invest in the United States. And in contrast to measures such 
as infrastructure spending, this one-time tax cut for the very 
wealthiest would have a relatively small effect on cumulative 
economic output.
    The benefit provided by H.R. 9 is arbitrary. In the case of 
small business owners, the same amount of small business income 
will not always produce the same benefit. Because the benefit 
is a deduction and not a credit, the value of the benefit 
increases with income. In addition, because the size of the 
benefit can be limited by a taxpayer's taxable income, losses 
that reduce or eliminate such income, including losses carried 
forward from prior years, can eliminate the benefit.
    Preliminary analyses indicate that H.R. 9 is a $46 billion 
tax cut disproportionately benefitting the very wealthiest 
Americans. Although a distributional analysis by the Joint 
Committee on Taxation is not yet available, the Center on 
Budget and Policy Priorities indicated that, based on an 
analysis provided by the Tax Policy Center, approximately ``49 
percent of the tax cut [provided by H.R. 9] would go to the 0.3 
percent of people with incomes exceeding $1 million in 2012; 
they each would receive an average tax cut of more than 
$44,000.'' Middle- and low-income families are struggling to 
recover from the deepest recession in decades; they have lost 
jobs, homes and retirement security. The Republican Majority 
for months resisted extending the payroll tax cut benefitting 
these families. But now, the Majority is rushing to put forward 
another tax break for the very wealthiest Americans.
    Given that this Committee has spent the last year and three 
months talking about tax reform, perhaps the most striking 
thing about H.R. 9 is that it is the antithesis of tax reform. 
The House Republican budget assumes that this Committee will 
produce a tax reform package with two rate brackets, but it 
offers no clear indication of how to finance rate reductions 
that would cost trillions of dollars. The only hint we have 
gotten is the vague promise of the House Budget Committee 
chairman to eliminate what he calls ``tax loopholes.'' But to 
raise sufficient funds for his tax reform plans, his definition 
of ``tax loophole'' would have to include provisions related to 
health, education, home mortgage interest, and pensions. These 
are not ``loopholes.'' Rather, in many cases, they are 
provisions designed to achieve clear economic and social policy 
goals. Ironically, H.R. 9 would be a new tax expenditure and a 
temporary one at that. And it would have far less merit than 
policies, such as the mortgage interest deduction and the 
exclusion for employer-provided healthcare, that now appear to 
be in the majority's crosshairs.
    Finally, H.R. 9 is little more than a political device 
designed to give the majority a talking point for the week of 
April 15th. It is a distraction from the real businesses that 
should be before the Committee, including the continuing 
employment crisis and the need to address expiring provisions 
such as the AMT patch and other tax provisions critical to 
American businesses.

                                   Sander M. Levin.
                                   Charles B. Rangel.
                                   Fortney Pete Stark.
                                   Jim McDermott.
                                   John Lewis.
                                   John B. Larson.
                                   Mike Thompson.
                                   Earl Blumenauer.
                                   Ron Kind.
                                   Shelley Berkley.
                                   Bill Pascrell, Jr.
                                   Joseph Crowley.