Small Business Protection Accounts

(a)

In General

Subpart C of part II of subchapter E of chapter 1 of the Internal Revenue Code of 1986 (relating to taxable year for which deductions taken) is amended by inserting after section 468B the following:

468C.

Small Business Protection Accounts

(a)

Deduction Allowed

In the case of an individual engaged in an eligible small business, there shall be allowed as a deduction for any taxable year the amount paid in cash by the taxpayer during the taxable year to a Small Business Protection Account. (b)

Limitation

(1)

In general

The amount which a taxpayer may pay into a Small Business Protection Account for any taxable year shall not exceed 50 percent of so much of the net profit of the taxpayer (determined without regard to this section) which is attributable (determined in the manner applicable under section 1301) to any trade or business. (2)

Carryover of excess limitation

If the limitation under paragraph (1) for any taxable year exceeds the amount paid by the taxpayer to the taxpayer’s Small Business Protection Account for such year, the limitation under paragraph (1) for the following taxable year (determined without regard to this paragraph) shall be increased by such excess. (c)

Eligible Small Business

For purposes of this section, the term eligible small business means any trade or business if— (1)such trade or business (or any predecessor thereof) meets the gross receipts test of section 448(c) for all prior taxable years, (2)such trade or business is not a passive activity (within the meaning of section 469(c)) of the taxpayer, (3)such trade or business is not a farming business (as defined in section 263A(e)(4)), and (4)such trade or business has never been determined by the United States Equal Employment Opportunity Commission to have engaged in job discrimination. (d)

Small Business Protection Account

For purposes of this section— (1)

In general

The term Small Business Protection Account means a trust created or organized in the United States for the exclusive benefit of the taxpayer, but only if the written governing instrument creating the trust meets the following requirements: (A)No contribution will be accepted for any taxable year in excess of the amount allowed as a deduction under subsection (a) for such year. (B)The trustee is a bank (as defined in section 408(n)) or another person who demonstrates to the satisfaction of the Secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section. (C)The assets of the trust consist entirely of cash or of obligations which have adequate stated interest (as defined in section 1274(c)(2)) and which pay such interest not less often than annually. (D)All income of the trust is distributed currently to the grantor. (E)The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund. (2)

Account taxed as grantor trust

The grantor of a Small Business Protection Account shall be treated for purposes of this title as the owner of such Account and shall be subject to tax thereon in accordance with subpart E of part I of subchapter J of this chapter (relating to grantors and others treated as substantial owners). (e)

Inclusion of Amounts Distributed

(1)

In general

Except as provided in paragraph (2), there shall be includible in the gross income of the taxpayer for any taxable year— (A)any amount distributed from a Small Business Protection Account of the taxpayer during such taxable year, and (B)any deemed distribution under— (i)subsection (f)(1) (relating to deposits not distributed within 5 years), (ii)subsection (f)(2) (relating to cessation in eligible small business), and (iii)subparagraph (A) or (B) of subsection (f)(3) (relating to prohibited transactions and pledging account as security). (2)

Exceptions

Paragraph (1)(A) shall not apply to— (A)any distribution to the extent attributable to income of the Account, and (B)the distribution of any contribution paid during a taxable year to a Small Business Protection Account to the extent that such contribution exceeds the limitation applicable under subsection (b) if requirements similar to the requirements of section 408(d)(4) are met.

For purposes of subparagraph (A), distributions shall be treated as first attributable to income and then to other amounts.

(f)

Special rules

(1)

Tax on deposits in account which are not distributed within 5 years

(A)

In general

If, at the close of any taxable year, there is a nonqualified balance in any Small Business Protection Account— (i)there shall be deemed distributed from such Account during such taxable year an amount equal to such balance, and (ii)the taxpayer’s tax imposed by this chapter for such taxable year shall be increased by 10 percent of such deemed distribution.

The preceding sentence shall not apply if an amount equal to such nonqualified balance is distributed from such Account to the taxpayer before the due date (including extensions) for filing the return of tax imposed by this chapter for such year (or, if earlier, the date the taxpayer files such return for such year).

(B)

Nonqualified balance

For purposes of subparagraph (A), the term nonqualified balance means any balance in the Account on the last day of the taxable year which is attributable to amounts deposited in such Account before the 4th preceding taxable year. (C)

Ordering rule

For purposes of this paragraph, distributions from a Small Business Protection Account (other than distributions of current income) shall be treated as made from deposits in the order in which such deposits were made, beginning with the earliest deposits. (2)

Cessation in eligible business

At the close of the first disqualification period after a period for which the taxpayer was engaged in an eligible small business, there shall be deemed distributed from the Small Business Protection Account of the taxpayer an amount equal to the balance in such Account (if any) at the close of such disqualification period. For purposes of the preceding sentence, the term disqualification period means any period of 2 consecutive taxable years for which the taxpayer is not engaged in an eligible small business. (3)

Certain rules to apply

Rules similar to the following rules shall apply for purposes of this section: (A)Section 220(f)(8) (relating to treatment on death). (B)Section 408(e)(2) (relating to loss of exemption of account where individual engages in prohibited transaction). (C)Section 408(e)(4) (relating to effect of pledging account as security). (D)Section 408(g) (relating to community property laws). (E)Section 408(h) (relating to custodial accounts). (4)

Time when payments deemed made

For purposes of this section, a taxpayer shall be deemed to have made a payment to a Small Business Protection Account on the last day of a taxable year if such payment is made on account of such taxable year and is made on or before the due date (without regard to extensions) for filing the return of tax for such taxable year. (5)

Individual

For purposes of this section, the term individual shall not include an estate or trust. (6)

Deduction not allowed for self-employment tax

The deduction allowable by reason of subsection (a) shall not be taken into account in determining an individual’s net earnings from self-employment (within the meaning of section 1402(a)) for purposes of chapter 2. (g)

Reports

The trustee of a Small Business Protection Account shall make such reports regarding such Account to the Secretary and to the person for whose benefit the Account is maintained with respect to contributions, distributions, and such other matters as the Secretary may require under regulations. The reports required by this subsection shall be filed at such time and in such manner and furnished to such persons at such time and in such manner as may be required by such regulations.

(b)

Tax on Excess Contributions

(1)Subsection (a) of section 4973 of such Code (relating to tax on excess contributions to certain tax-favored accounts and annuities) is amended by redesignating paragraphs (4) and (5) as paragraphs (5) and (6), respectively, and by inserting after paragraph (3) the following:

(4)a Small Business Protection Account (within the meaning of section 468C(d)),

(2)Section 4973 of such Code is amended by adding at the end the following:

(h)

Excess Contributions to Small Business Protection Account

For purposes of this section, in the case of a Small Business Protection Account (within the meaning of section 468C(d)), the term excess contributions means the amount by which the amount contributed for the taxable year to the Account exceeds the amount which may be contributed to the Account under section 468C(b) for such taxable year. For purposes of this subsection, any contribution which is distributed out of the Small Business Protection Account in a distribution to which section 468C(e)(2)(B) applies shall be treated as an amount not contributed.

(3)The section heading for section 4973 of such Code is amended to read as follows:

4973.

Excess contributions to certain accounts, annuities, etc

(4)The table of sections for chapter 43 of such Code is amended by striking the item relating to section 4973 and inserting the following:

Sec. 4973. Excess contributions to certain accounts, annuities, etc

(c)

Tax on Prohibited Transactions

(1)Subsection (c) of section 4975 of such Code (relating to tax on prohibited transactions) is amended by adding at the end the following:

(7)

Special rule for Small Business Protection Account

A person for whose benefit a Small Business Protection Account (within the meaning of section 468C(d)) is established shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be a Small Business Protection Account by reason of the application of section 468C(f)(3)(A) to such account.

(2)Paragraph (1) of section 4975(e) of such Code is amended by redesignating subparagraphs (F) and (G) as subparagraphs (G) and (H), respectively, and by inserting after subparagraph (E) the following:

(F)a Small Business Protection Account described in section 468C(d),

(d)

Failure To Provide Reports on Small Business Protection Accounts

Paragraph (2) of section 6693(a) of such Code (relating to failure to provide reports on certain tax-favored accounts or annuities) is amended by redesignating subparagraphs (D) and (E) as subparagraphs (E) and (F), respectively, and by inserting after subparagraph (C) the following:

(D)section 468C(g) (relating to Small Business Protection Accounts),

(e)

Clerical Amendment

The table of sections for subpart C of part II of subchapter E of chapter 1 of such Code is amended by inserting after the item relating to section 468B the following:

Sec. 468C. Small Business Protection Accounts

(f)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act. (g)

Report

Not later than 1 year after the date of the enactment of this Act, the Administrator of the Small Business Administration shall submit a report on the implementation and effectiveness of section 468C of the Internal Revenue Code of 1986 (as added by this section), with emphasis on the impact of Small Business Protection Accounts in enterprise and similar zones, to the Committee on Small Business of the House of Representatives and the Committee on Small Business and Entrepreneurship of the Senate.