Entrepreneur Incentive Act of 1985

Entrepreneur Incentive Act of 1985 - Amends the Internal Revenue Code to permit a taxpayer who sells a capital asset which has been held for more than six months to not recognize any gain realized on the sale to the extent that the amount realized from such sale is invested in a qualified small business investment within one year of such sale. Provides that the maximum amount of gain which may not be recognized cannot exceed $125,000 for the taxable year and all prior taxable years.

Treats any exchange of property as a sale for purposes of the nonrecognition provisions. Prohibits the nonrecognition of gain to the extent the gain is ordinary income.

Requires the basis of the small business investment to be reduced by the amount of gain not recognized on the sale of the property. Extends the period of statute of limitations with respect to assessment of tax relating to such sale or exchange.

Permits a deduction for amounts paid by the taxpayer for the purchase of stock of a small business corporation from such corporation under a qualified stock purchase plan. Limits the deduction in a taxable year to $15,000 ($30,000 for a joint return). Requires a qualified stock purchase plan to: (1) sell no more than $250,000 in stock; (2) prohibits the purchase by a person which would result in such person owning more than 50 percent of the stock of the corporation; (3) sell stock only to new stockholders; (4) require the purchase of the stock with cash; (5) prohibit any distribution with respect to such stock for a three year period after the stock is purchased; (6) limit the transfer of such stock for three years after purchase; and (7) require the proceeds of such sales to be used in the conduct of an active trade or business of the corporation.

Reduces the amount of income tax imposed on small business corporations by an amount equal to the lesser of the tax imposed on: (1) the amount of dividends paid by the corporation during the taxable year; or (2) $50,000. Provides a phase-out of this tax reduction for corporations with a taxable income in excess of $2,000,000. Requires the dividends, which are eligible for this provision, to be: (1) paid in cash; (2) pro rata, with no preference to any share of stock as compared with other shares of the same class, and with no preference of one class of stock over another except to the extent it is entitled to preference; and (3) not in redemption or in partial liquidation or corporate liquidation.

Sets forth various rules relating to the reduction of the income tax liability.

Permits an ordinary loss deduction for securities of a small business corporation which becomes worthless.