To amend the Internal Revenue Code of 1986 to allow small business employers a credit against income tax with respect to employees who participate in the military reserve components and are called to active duty and with respect to replacement employees and to allow a comparable credit for activated military reservists who are self-employed individuals, and for other purposes.

February 1, 2005

Mr. KERRY (for himself, Mr. LEAHY, Mrs. MURRAY, Mr. ROCKEFELLER, Mr. DURBIN, Mr. PRYOR, and Ms. STABENOW) introduced the following bill; which was read twice and referred to the Committee on Finance

To amend the Internal Revenue Code of 1986 to allow small business employers a credit against income tax with respect to employees who participate in the military reserve components and are called to active duty and with respect to replacement employees and to allow a comparable credit for activated military reservists who are self-employed individuals, and for other purposes.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the `Small Business Military Reservist Tax Credit Act'.

SEC. 2. CREDIT FOR INCOME DIFFERENTIAL FOR EMPLOYMENT OF ACTIVATED MILITARY RESERVIST AND REPLACEMENT PERSONNEL.

(a) In General- Subpart B of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to foreign tax credit, etc.) is amended by adding at the end the following new section:

`SEC. 30B. EMPLOYER WAGE CREDIT FOR ACTIVATED MILITARY RESERVISTS.

`(a) General Rule- There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of--

`(1) in the case of a small business employer, the employment credit with respect to all qualified employees and qualified replacement employees of the taxpayer, plus

`(2) the self-employment credit of a qualified self-employed taxpayer.

`(b) Employment Credit- For purposes of this section--

`(1) QUALIFIED EMPLOYEES-

`(A) IN GENERAL- The employment credit with respect to a qualified employee of the taxpayer for any taxable year is equal to 50 percent of the lesser of--

`(i) the excess, if any, of--

`(I) the qualified employee's average daily qualified compensation for the taxable year, over

`(II) the average daily military pay and allowances received by the qualified employee during the taxable year, while participating in qualified reserve component duty to the exclusion of the qualified employee's normal employment duties for the number of days the qualified employee participates in qualified reserve component duty during the taxable year, including time spent in a travel status, or

`(ii) $30,000.

The employment credit, with respect to all qualified employees, is equal to the sum of the employment credits for each qualified employee under this subsection.

`(B) AVERAGE DAILY QUALIFIED COMPENSATION AND AVERAGE DAILY MILITARY PAY AND ALLOWANCES- As used with respect to a qualified employee--

`(i) the term `average daily qualified compensation' means the qualified compensation of the qualified employee for the taxable year divided by the difference between--

`(I) 365, and

`(II) the number of days the qualified employee participates in qualified reserve component duty during the taxable year, including time spent in a travel status, and

`(ii) the term `average daily military pay and allowances' means--

`(I) the amount paid to the qualified employee during the taxable year as military pay and allowances on account of the qualified employee's participation in qualified reserve component duty, divided by

`(II) the total number of days the qualified employee participates in qualified reserve component duty, including time spent in travel status.

`(C) QUALIFIED COMPENSATION- When used with respect to the compensation paid or that would have been paid to a qualified employee for any period during which the qualified employee participates in qualified reserve component duty, the term `qualified compensation' means--

`(i) compensation which is normally contingent on the qualified employee's presence for work and which would be deductible from the taxpayer's gross income under section 162(a)(1) if the qualified employee were present and receiving such compensation,

`(ii) compensation which is not characterized by the taxpayer as vacation or holiday pay, or as sick leave or pay, or as any other form of pay for a nonspecific leave of absence, and with respect to which the number of days the qualified employee participates in qualified reserve component duty does not result in any reduction in the amount of vacation time, sick leave, or other nonspecific leave previously credited to or earned by the qualified employee, and

`(iii) group health plan costs (if any) with respect to the qualified employee.

`(D) QUALIFIED EMPLOYEE- The term `qualified employee' means a person who--

`(i) has been an employee of the taxpayer for the 91-day period immediately preceding the period during which the employee participates in qualified reserve component duty, and

`(ii) is a member of the Ready Reserve of a reserve component of an Armed Force of the United States as defined in sections 10142 and 10101 of title 10, United States Code.

`(2) QUALIFIED REPLACEMENT EMPLOYEES-

`(A) IN GENERAL- The employment credit with respect to a qualified replacement employee of the taxpayer for any taxable year is equal to 50 percent of the lesser of--

`(i) the individual's qualified compensation attributable to service rendered as a qualified replacement employee, or

`(ii) $12,000.

The employment credit, with respect to all qualified replacement employees, is equal to the sum of the employment credits for each qualified replacement employee under this subsection.

`(B) QUALIFIED COMPENSATION- When used with respect to the compensation paid to a qualified replacement employee, the term `qualified compensation' means--

`(i) compensation which is normally contingent on the qualified replacement employee's presence for work and which is deductible from the taxpayer's gross income under section 162(a)(1),

`(ii) compensation which is not characterized by the taxpayer as vacation or holiday pay, or as sick leave or pay, or as any other form of pay for a nonspecific leave of absence, and

`(iii) group health plan costs (if any) with respect to the qualified replacement employee.

`(C) QUALIFIED REPLACEMENT EMPLOYEE- The term `qualified replacement employee' means an individual who is hired to replace a qualified employee or a qualified self-employed taxpayer, but only with respect to the period during which such employee or taxpayer participates in qualified reserve component duty, including time spent in travel status.

`(c) Self-Employment Credit- For purposes of this section--

`(1) IN GENERAL- The self-employment credit of a qualified self-employed taxpayer for any taxable year is equal to 50 percent of the lesser of--

`(A) the excess, if any, of--

`(i) the self-employed taxpayer's average daily self-employment income for the taxable year over

`(ii) the average daily military pay and allowances received by the taxpayer during the taxable year, while participating in qualified reserve component duty to the exclusion of the taxpayer's normal self-employment duties for the number of days the taxpayer participates in qualified reserve component duty during the taxable year, including time spent in a travel status, or

`(B) $30,000.

`(2) AVERAGE DAILY SELF-EMPLOYMENT INCOME AND AVERAGE DAILY MILITARY PAY AND ALLOWANCES- As used with respect to a self-employed taxpayer--

`(A) the term `average daily self-employment income' means the self-employment income (as defined in section 1402(b)) of the taxpayer for the taxable year plus the amount paid for insurance which constitutes medical care for the taxpayer for such year (within the meaning of section 162(l)) divided by the difference between--

`(i) 365, and

`(ii) the number of days the taxpayer participates in qualified reserve component duty during the taxable year, including time spent in a travel status, and

`(B) the term `average daily military pay and allowances' means--

`(i) the amount paid to the taxpayer during the taxable year as military pay and allowances on account of the taxpayer's participation in qualified reserve component duty, divided by

`(ii) the total number of days the taxpayer participates in qualified reserve component duty, including time spent in travel status.

`(3) QUALIFIED SELF-EMPLOYED TAXPAYER- The term `qualified self-employed taxpayer' means a taxpayer who--

`(A) has net earnings from self-employment (as defined in section 1402(a)) for the taxable year, and

`(B) is a member of the Ready Reserve of a reserve component of an Armed Force of the United States.

`(d) Credit in Addition to Deduction- The employment credit or the self-employment credit provided in this section is in addition to any deduction otherwise allowable with respect to compensation actually paid to a qualified employee, qualified replacement employee, or qualified self-employed taxpayer during any period the qualified employee or qualified self-employed taxpayer participates in qualified reserve component duty to the exclusion of normal employment duties.

`(e) Coordination With Other Credits- The amount of credit otherwise allowable under sections 51(a) and 1396(a) with respect to any employee shall be reduced by the credit allowed by this section with respect to such employee.

`(f) Limitations-

`(1) APPLICATION WITH OTHER CREDITS- The credit allowed under subsection (a) for any taxable year shall not exceed the excess (if any) of--

`(A) the regular tax for the taxable year reduced by the sum of the credits allowable under subpart A and sections 27, 29, and 30, over

`(B) the tentative minimum tax for the taxable year.

`(2) DISALLOWANCE FOR FAILURE TO COMPLY WITH EMPLOYMENT OR REEMPLOYMENT RIGHTS OF MEMBERS OF THE RESERVE COMPONENTS OF THE ARMED FORCES OF THE UNITED STATES- No credit shall be allowed under subsection (a) to a taxpayer for--

`(A) any taxable year, beginning after the date of the enactment of this section, in which the taxpayer is under a final order, judgment, or other process issued or required by a district court of the United States under section 4323 of title 38 of the United States Code with respect to a violation of chapter 43 of such title, and

`(B) the 2 succeeding taxable years.

`(3) DISALLOWANCE WITH RESPECT TO PERSONS ORDERED TO ACTIVE DUTY FOR TRAINING- No credit shall be allowed under subsection (a) to a taxpayer with respect to any period by taking into account any person who is called or ordered to active duty for any of the following types of duty:

`(A) Active duty for training under any provision of title 10, United States Code.

`(B) Training at encampments, maneuvers, outdoor target practice, or other exercises under chapter 5 of title 32, United States Code.

`(C) Full-time National Guard duty, as defined in section 101(d)(5) of title 10, United States Code.

`(g) General Definitions and Special Rules- For purposes of this section--

`(1) SMALL BUSINESS EMPLOYER-

`(A) IN GENERAL- The term `small business employer' means, with respect to any taxable year, any employer who employed an average of 50 or fewer employees on business days during such taxable year.

`(B) CONTROLLED GROUPS- For purposes of subparagraph (A), all persons treated as a single employer under subsection (b), (c), (m), or (o) of section 414 shall be treated as a single employer.

`(2) MILITARY PAY AND ALLOWANCES- The term `military pay' means pay as that term is defined in section 101(21) of title 37, United States Code, and the term `allowances' means the allowances payable to a member of the Armed Forces of the United States under chapter 7 of that title.

`(3) QUALIFIED RESERVE COMPONENT DUTY- The term `qualified reserve component duty' includes only active duty performed, as designated in the reservist's military orders, in support of a contingency operation as defined in section 101(a)(13) of title 10, United States Code.

`(4) SPECIAL RULES FOR CERTAIN MANUFACTURERS-

`(A) IN GENERAL- In the case of any qualified manufacturer--

`(i) subsections (b)(1)(A)(ii) and (c)(1)(B) shall be applied by substituting `$40,000' for `$30,000',

`(ii) subsection (b)(2)(A)(ii) shall be applied by substituting `$20,000' for `$12,000', and

`(iii) paragraph (1)(A) of this subsection shall be applied by substituting `100' for `50'.

`(B) QUALIFIED MANUFACTURER- For purposes of this paragraph, the term `qualified manufacturer' means any person if--

`(i) the primary business of such person is classified in sector 31, 32, or 33 of the North American Industrial Classification System, and

`(ii) all of such person's facilities which are used for production in such business are located in the United States.

`(5) CARRYBACK AND CARRYFORWARD ALLOWED-

`(A) IN GENERAL- If the credit allowable under subsection (a) for a taxable year exceeds the amount of the limitation under subsection (f)(1) for such taxable year (in this paragraph referred to as the `unused credit year'), such excess shall be a credit carryback to each of the 3 taxable years preceding the unused credit year and a credit carryforward to each of the 20 taxable years following the unused credit year.

`(B) RULES- Rules similar to the rules of section 39 shall apply with respect to the credit carryback and credit carryforward under subparagraph (A).

`(6) CERTAIN RULES TO APPLY- Rules similar to the rules of subsections (c), (d), and (e) of section 52 shall apply.'.

(b) Conforming Amendment- Section 55(c)(2) of the Internal Revenue Code of 1986 is amended by inserting `30B(f)(1),' after `30(b)(3),'.

(c) Clerical Amendment- The table of sections for subpart B of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end of 30A the following new item:

`Sec. 30B. Employer wage credit for activated military reservists'.

(d) Effective Date; Special Rule-

(1) EFFECTIVE DATE- The amendments made by this section shall apply to amounts paid after September 11, 2001, in taxable years ending after such date.

(2) WAIVER OF LIMITATIONS- If refund or credit of any overpayment of tax resulting from the amendments made by this section is prevented at any time before the close of the 1-year period beginning on the date of the enactment of this Act by the operation of any law or rule of law (including res judicata), such refund or credit may nevertheless be made or allowed if claim therefor is filed before the close of such period.

END