Deduction for qualified small business income

(a)

In general

Paragraph (1) of section 199(a) of the Internal Revenue Code of 1986 is amended to read as follows:

(1)

In general

There shall be allowed as a deduction an amount equal to the sum of— (A)9 percent of the lesser of— (i)the qualified production activities income of the taxpayer for the taxable year, or (ii)taxable income (determined without regard to this section) for the taxable year, and (B)in the case of a qualified small business for a taxable year beginning in 2010 or 2011, 20 percent of the lesser of— (i)the qualified small business income of the taxpayer for the taxable year, or (ii)taxable income (determined without regard to this section) for the taxable year.

(b)

Qualified small business; qualified small business income

Section 199 of such Code is amended by adding at the end the following new subsection:

(e)

Qualified small business; qualified small business income

(1)

Qualified small business

(A)

In general

For purposes of this section, the term qualified small business means any taxpayer for any taxable year if the annual average number of employees employed by such taxpayer during such taxable year was 500 or fewer. (B)

Aggregation rule

For purposes of subparagraph (A), 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 1 taxpayer for purposes of this subsection. (C)

Special rule

If a taxpayer is treated as a qualified small business for any taxable year, the taxpayer shall not fail to be treated as a qualified small business for any subsequent taxable year solely because the number of employees employed by such taxpayer during such subsequent taxable year exceeds 500. The preceding sentence shall cease to apply to such taxpayer in the first taxable year in which there is an ownership change (as defined by section 382(g) in respect of a corporation, or by applying principles analogous to such ownership change in the case of a taxpayer that is a partnership) with respect to the stock (or partnership interests) of the taxpayer. (2)

Qualified small business income

(A)

In general

For purposes of this section, the term qualified small business income means the excess of— (i)the income of the qualified small business which— (I)is attributable to the actual conduct of a trade or business, (II)is income from sources within the United States (within the meaning of section 861), and (III)is not passive income (as defined in section 904(d)(2)(B)), over (ii)the sum of— (I)the cost of goods sold that are allocable to such income, and (II)other expenses, losses, or deductions (other than the deduction allowed under this section), which are properly allocable to such income. (B)

Exceptions

The following shall not be treated as income of a qualified small business for purposes of subparagraph (A): (i)Any income which is attributable to any property described in section 1400N(p)(3). (ii)Any income which is attributable to the ownership or management of any professional sports team. (iii)Any income which is attributable to a trade or business described in subparagraph (B) of section 1202(e)(3). (iv)Any income which is attributable to any property with respect to which records are required to be maintained under section 2257 of title 18, United States Code. (C)

Allocation rules, etc

Rules similar to the rules of paragraphs (2), (3), (4)(D), and (7) of subsection (c) shall apply for purposes of this paragraph. (3)

Special rules

Except as otherwise provided by the Secretary, rules similar to the rules of subsection (d) shall apply for purposes of this subsection.

(c)

Conforming amendments

(1)Section 199(a)(2) of such Code is amended by striking paragraph (1) and inserting paragraph (1)(A). (2)The following provisions of section 199 of such Code are each amended by striking (a)(1)(B) and inserting (a)(1)(A)(ii): (A)Subsection (d)(2). (B)Subsection (d)(6)(B). (C)Subsection (d)(7). (d)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2009.