S. 3857 - Bringing Opportunities to Our Small Business Taxpayers Act - BOOST Act

109th CONGRESS
2d Session

S. 3857

To amend the Internal Revenue Code of 1986 to provide incentives to small businesses.

IN THE SENATE OF THE UNITED STATES

September 6, 2006

Mr. SMITH (for himself and Mrs. LINCOLN) introduced the following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide incentives to small businesses.

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 `Bringing Opportunities to Our Small Business Taxpayers Act' or `BOOST Act'.

TITLE I--TAX FAIRNESS FOR SMALL BUSINESSES

SEC. 101. PERMANENT EXTENSION OF EXPENSING FOR SMALL BUSINESSES.

(a) Dollar Limitation- Paragraph (1) of section 179(b) of the Internal Revenue Code of 1986, as amended by the Tax Increase Prevention and Reconciliation Act of 2005, is amended by striking `$25,000 ($100,000 in the case of taxable years beginning after 2002 and before 2010)' and inserting `$100,000'.

(b) Reduction in Limitation- Paragraph (2) of section 179(b) of such Code, as amended by the Tax Increase Prevention and Reconciliation Act of 2005, is amended by striking `$200,000 ($400,000 in the case of taxable years beginning after 2002 and before 2010)' and inserting `$400,000'.

(c) Inflation Adjustments- Subparagraph (A) of section 179(b)(5) of such Code, as amended by the Tax Increase Prevention and Reconciliation Act of 2005, is amended by striking `and before 2010'.

(d) Election- Paragraph (2) of section 179(c) of such Code, as amended by the Tax Increase Prevention and Reconciliation Act of 2005, is amended by striking `and before 2010'.

(e) Computer Software- Clause (ii) of section 179(d)(1)(A), as amended by the Tax Increase Prevention and Reconciliation Act of 2005, is amended by striking `and before 2010'.

SEC. 102. MODIFICATION OF CONSTRUCTION CONTRACTS EXCEPTION TO PERCENTAGE OF COMPLETION METHOD OF ACCOUNTING.

(a) In General- Clause (ii) section 460(e)(1)(B) of the Internal Revenue Code of 1986 is amended by striking `$10,000,000' and inserting `$25,000,000'.

(b) Effective Date- The amendments made by this section shall apply to contracts entered into after the date of the enactment of this Act.

SEC. 103. MODIFICATION OF LOOK-BACK METHOD FOR CERTAIN CONSTRUCTION CONTRACTS.

(a) In General- Subparagraph (B) of section 460(b)(3) of the Internal Revenue Code of 1986 is amended to read as follows:

`(B) LOOK-BACK METHOD NOT TO APPLY TO CERTAIN CONTRACTS- Paragraph (1)(B) shall not apply to--

`(i) any construction contract which is--

`(I) entered into by a taxpayer whose average annual gross receipts for the 3 taxable years preceding the taxable year in which such contract is completed do not exceed $25,000,000, and

`(II) completed within 3 years of the contract commencement date, or

`(ii) any other contract--

`(I) the gross price of which (as of the completion of the contract) does not exceed the lesser of $1,000,000 or 1 percent of the average annual gross receipts of the taxpayer for the 3 taxable years preceding the taxable year in which the contract was completed, and

`(II) which is completed within 2 years of the contract commencement date.

For purposes of this subparagraph, rules similar to the rules of subsections (e)(2) and (f)(3) shall apply.'.

(b) Effective Date- The amendments made by this section shall apply to contracts completed in taxable years ending after the date of the enactment of this Act.

SEC. 104. USE OF CASH METHOD OF ACCOUNTING FOR CERTAIN SMALL BUSINESSES.

(a) In General- Section 446 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsection:

`(g) Use of Cash Method of Accounting by Certain Taxpayers-

`(1) IN GENERAL- Notwithstanding section 471 and subject to such regulations as the Secretary may provide, a qualifying small business taxpayer may use the cash receipts and disbursements method of accounting.

`(2) QUALIFYING SMALL BUSINESS TAXPAYER- For purposes of this subsection, the term `qualifying small business taxpayer' means a taxpayer which--

`(A) meets the gross receipts test under section 448(c) (determined by substituting `$10,000,000' for `$5,000,000' each place it appears therein),

`(B) is not prohibited from using the cash receipts and disbursement method of accounting under section 448, and

`(C) meets the requirements described in section 4.01 of Revenue Procedure 2002-28.'.

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

TITLE II--S CORPORATION PARITY

SEC. 201. REDUCED RECOGNITION PERIOD FOR BUILT-IN GAINS.

(a) In General- Paragraph (7) of section 1374(d) of the Internal Revenue Code of 1986 (relating to definitions and special rules) is amended to read as follows:

`(7) RECOGNITION PERIOD- The term `recognition period' means the 7-year period beginning with the 1st day of the 1st taxable year for which the corporation was an S corporation. For purposes of applying this section to any amount includible in income by reason of distributions to shareholders pursuant to section 593(e), the preceding sentence shall be applied without regard to the duration of the recognition period in effect on the date of such distribution.'.

(b) Effective Date-

(1) GENERAL RULE- The amendment made by this section shall apply to any recognition period in effect on or after the date of the enactment of this Act.

(2) SPECIAL APPLICATION TO EXISTING PERIODS EXCEEDING 7 YEARS- Any recognition period in effect on the date of the enactment of this Act, the length of which is greater than 7 years, shall end on such date.

SEC. 202. MODIFICATION TO S CORPORATION PASSIVE INVESTMENT INCOME RULES.

(a) Increased Percentage Limit- Paragraph (2) of section 1375(a) of the Internal Revenue Code of 1986 is amended by striking `25 percent' and inserting `60 percent'.

(b) Repeal of Excessive Passive Investment Income as a Termination Event-

(1) IN GENERAL- Section 1362(d) of the Internal Revenue Code of 1986 is amended by striking paragraph (3).

(2) CONFORMING AMENDMENT- Subsection (b) of section 1375 of such Code is amended by striking paragraphs (3) and (4) and inserting the following new paragraph:

`(3) PASSIVE INVESTMENT INCOME DEFINED-

`(A) IN GENERAL- Except as otherwise provided in this paragraph, the term `passive investment income' means gross receipts derived from royalties, rents, dividends, interest, and annuities.

`(B) EXCEPTION FOR INTEREST ON NOTES FROM SALES OF INVENTORY- The term `passive investment income' shall not include interest on any obligation acquired in the ordinary course of the corporation's trade or business from its sale of property described in section 1221(a)(1).

`(C) TREATMENT OF CERTAIN LENDING OR FINANCE COMPANIES- If the S corporation meets the requirements of section 542(c)(6) for the taxable year, the term `passive investment income' shall not include gross receipts for the taxable year which are derived directly from the active and regular conduct of a lending or finance business (as defined in section 542(d)(1)).

`(D) TREATMENT OF CERTAIN DIVIDENDS- If an S corporation holds stock in a C corporation meeting the requirements of section 1504(a)(2), the term `passive investment income' shall not include dividends from such C corporation to the extent such dividends are attributable to the earnings and profits of such C corporation derived from the active conduct of a trade or business.

`(E) EXCEPTION FOR BANKS, ETC- In the case of a bank (as defined in section 581), a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(a))), or a financial holding company (within the meaning of section 2(p) of such Act (12 U.S.C. 1841(p))), the term `passive investment income' shall not include--

`(i) interest income earned by such bank or company, or

`(ii) dividends on assets required to be held by such bank or company, including stock in the Federal Reserve Bank, the Federal Home Loan Bank, or the Federal Agricultural Mortgage Bank or participation certificates issued by a Federal Intermediate Credit Bank.

`(F) COORDINATION WITH SECTION 1374- The amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meanings as when used in section 1374.'.

(1) Subparagraph (J) of section 26(b)(2) of the Internal Revenue Code of 1986 is amended by striking `25 percent' and inserting `60 percent'.

(2) Clause (i) of section 1042(c)(4)(A) of such Code is amended by striking `section 1362(d)(3)(C)' and inserting `section 1375(b)(3)'.

(3) Subparagraph (B) of section 1362(f)(1) of such Code is amended by striking `or (3)'.

(4) Clause (i) of section 1375(b)(1)(A) of such Code is amended by striking `25 percent' and inserting `60 percent'.

(5) The heading for section 1375 of such Code is amended by striking `25 percent' and inserting `60 percent'.

(6) The item relating to section 1375 in the table of sections for part III of subchapter S of chapter 1 of such Code is amended by striking `25 percent' and inserting `60 percent'.

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

SEC. 203. NONRESIDENT ALIENS ALLOWED TO BE SHAREHOLDERS.

(a) Nonresident Aliens Allowed to Be Shareholders-

(1) IN GENERAL- Paragraph (1) of section 1361(b) of the Internal Revenue Code of 1986 (defining small business corporation) is amended--

(A) by adding `and' at the end of subparagraph (B),

(B) by striking subparagraph (C), and

(2) CONFORMING AMENDMENTS-

(A) Paragraph (4) and (5)(A) of section 1361(c) of such Code (relating to special rules for applying subsection (b)) are each amended by striking `subsection (b)(1)(D)' and inserting `subsection (b)(1)(C)'.

(B) Clause (i) of section 280G(b)(5)(A) of such Code (relating to general rule for exemption for small business corporations, etc.) is amended by striking `but without regard to paragraph (1)(C) thereof'.

(b) Nonresident Alien Shareholder Treated as Engaged in Trade or Business Within United States-

(1) IN GENERAL- Section 875 of the Internal Revenue Code of 1986 is amended--

(A) by striking `and' at the end of paragraph (1),

(B) by striking the period at the end of paragraph (2) and inserting `, and', and

`(3) a nonresident alien individual shall be considered as being engaged in a trade or business within the United States if the S corporation of which such individual is a shareholder is so engaged.'.

(2) PRO RATA SHARE OF S CORPORATION INCOME- The last sentence of section 1441(b) of such Code (relating to income items) is amended to read as follows: `In the case of a nonresident alien individual who is a member of a domestic partnership or a shareholder of an S corporation, the items of income referred to in subsection (a) shall be treated as referring to items specified in this subsection included in his distributive share of the income of such partnership or in his pro rata share of the income of such S corporation.'.

(3) APPLICATION OF WITHHOLDING TAX ON NONRESIDENT ALIEN SHAREHOLDERS- Section 1446 of such Code (relating to withholding tax on foreign partners' share of effectively connected income) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:

`(f) S Corporation Treated as Partnership, etc- For purposes of this section--

`(1) an S corporation shall be treated as a partnership,

`(2) the shareholders of such corporation shall be treated as partners of such partnership,

`(3) any reference to section 704 shall be treated as a reference to section 1366, and

`(4) no withholding tax under subsection (a) shall be required in the case of any income realized by such corporation and allocable to a shareholder which is an electing small business trust (as defined in section 1361(e)).'.

(4) CONFORMING AMENDMENTS-

(A) The heading of section 875 of such Code is amended to read as follows:

`SEC. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES AND TRUSTS; S CORPORATIONS.'.

(B) The heading of section 1446 of such Code is amended to read as follows:

`SEC. 1446. WITHHOLDING TAX ON FOREIGN PARTNERS' AND S CORPORATION SHAREHOLDERS' SHARE OF EFFECTIVELY CONNECTED INCOME.'.

(5) CLERICAL AMENDMENTS-

(A) The item relating to section 875 in the table of sections for subpart A of part II of subchapter N of chapter 1 of such Code is amended to read as follows:

`Sec. 875. Partnerships; beneficiaries of estates and trusts; S corporations.'.

(B) The item relating to section 1446 in the table of sections for subchapter A of chapter 3 of such Code is amended to read as follows:

`Sec. 1446. Withholding tax on foreign partners' and S corporation shareholders' share of effectively connected income.'.

(C) PERMANENT ESTABLISHMENT OF PARTNERS AND S CORPORATION SHAREHOLDERS- Section 894 of such Code (relating to income affected by treaty) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

`(c) Permanent Establishment of Partners and S Corporation Shareholders- If a partnership or S corporation has a permanent establishment in the United States (within the meaning of a treaty to which the United States is a party) at any time during a taxable year of such entity, a nonresident alien individual or foreign corporation which is a partner in such partnership, or a nonresident alien individual who is a shareholder in such S corporation, shall be treated as having a permanent establishment in the United States for purposes of such treaty.'.

(1) SECTION 1441- Section 1441 of the Internal Revenue Code of 1986 (relating to withholding of tax on nonresident aliens) is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection:

`(g) S Corporation Treated as Partnership, etc- For purposes of this section--

`(1) an S corporation shall be treated as a partnership,

`(2) the shareholders of such corporation shall be treated as partners of such partnership, and

`(3) no deduction or withholding under subsection (a) shall be required in the case of any item of income realized by such corporation and allocable to a shareholder which is an electing small business trust (as defined in section 1361(e)).'.

(2) SECTION 1445- Section 1445(e) of such Code (relating to special rules relating to distributions, etc., by corporations, partnerships, trusts, or estates) is amended by redesignating paragraph (6) as paragraph (7) and by inserting after paragraph (5) the following new paragraph:

`(6) S CORPORATION TREATED AS PARTNERSHIP, ETC- For purposes of this section--

`(A) an S corporation shall be treated as a partnership, and

`(B) the shareholders of such corporation shall be treated as partners of such partnership, and

`(C) no deduction or withholding under subsection (a) shall be required in the case of any gain realized by such corporation and allocable to a shareholder which is an electing small business trust (as defined in section 1361(e)).'.

(d) Additional Conforming Amendments-

(1) Section 1361(c)(2)(A)(i) of the Internal Revenue Code of 1986 is amended by striking `who is a citizen or resident of the United States'.

(2) Section 1361(d)(3)(B) of such Code is amended by striking `who is a citizen or resident of the United States'.

(3) Section 1361(e)(2) of such Code is amended by inserting `(including a nonresident alien)' after `person' the first place it appears.

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

SEC. 204. EXPANSION OF S CORPORATION ELIGIBLE SHAREHOLDERS TO INCLUDE IRAS.

(a) In General- Clause (vi) of section 1361(c)(2)(A) of the Internal Revenue Code of 1986 (relating to certain trusts permitted as shareholders) is amended to read as follows:

`(vi) A trust which constitutes an individual retirement account under section 408(a), including one designated as a Roth IRA under section 408A.'.

(b) Sale of Stock in IRA Relating to S Corporation Election Exempt From Prohibited Transaction Rules- Paragraph (16) of section 4975(d) of the Internal Revenue Code of 1986 (relating to exemptions) is amended to read as follows:

`(16) a sale of stock held by a trust which constitutes an individual retirement account under section 408(a) to the individual for whose benefit such account is established if--

`(A) such sale is pursuant to an election under section 1362(a) by the issuer of such stock,

`(B) such sale is for fair market value at the time of sale (as established by an independent appraiser) and the terms of the sale are otherwise at least as favorable to such trust as the terms that would apply on a sale to an unrelated party,

`(C) such trust does not pay any commissions, costs, or other expenses in connection with the sale, and

`(D) the stock is sold in a single transaction for cash not later than 120 days after the S corporation election is made.'.

TITLE III--PENSION PLAN INCENTIVES AND PARITY

SEC. 301. CREDIT FOR QUALIFIED PENSION PLAN CONTRIBUTIONS OF SMALL EMPLOYERS.

(a) In General- Subpart D of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to business related credits) is amended by adding at the end the following new section:

`SEC. 45N. SMALL EMPLOYER PENSION PLAN CONTRIBUTIONS.

`(a) General Rule- For purposes of section 38, in the case of an eligible employer, the small employer pension plan contribution credit determined under this section for any taxable year is an amount equal to 50 percent of the amount which would (but for subsection (f)(1)) be allowed as a deduction under section 404 for such taxable year for qualified employer contributions made to any qualified retirement plan on behalf of any employee who is not a highly compensated employee.

`(b) Credit Limited to 3 Years- The credit allowable by this section shall be allowed only with respect to the period of 3 taxable years beginning with the first taxable year for which a credit is allowable with respect to a plan under this section.

`(c) Qualified Employer Contribution- For purposes of this section--

`(1) DEFINED CONTRIBUTION PLANS- In the case of a defined contribution plan, the term `qualified employer contribution' means the amount of nonelective and matching contributions to the plan made by the employer on behalf of any employee who is not a highly compensated employee to the extent such amount does not exceed 3 percent of such employee's compensation from the employer for the year.

`(2) DEFINED BENEFIT PLANS- In the case of a defined benefit plan, the term `qualified employer contribution' means the amount of employer contributions to the plan made on behalf of any employee who is not a highly compensated employee to the extent that the accrued benefit of such employee derived from employer contributions for the year does not exceed the equivalent (as determined under regulations prescribed by the Secretary and without regard to contributions and benefits under the Social Security Act) of 3 percent of such employee's compensation from the employer for the year.

`(d) Qualified Retirement Plan-

`(1) IN GENERAL- The term `qualified retirement plan' means any plan described in section 401(a) which includes a trust exempt from tax under section 501(a) if the plan meets--

`(A) the contribution requirements of paragraph (2),

`(B) the vesting requirements of paragraph (3), and

`(C) the distribution requirements of paragraph (4).

`(2) CONTRIBUTION REQUIREMENTS-

`(A) IN GENERAL- The requirements of this paragraph are met if, under the plan--

`(i) the employer is required to make nonelective contributions of at least 1 percent of compensation (or the equivalent thereof in the case of a defined benefit plan) for each employee who is not a highly compensated employee who is eligible to participate in the plan, and

`(ii) allocations of nonelective employer contributions, in the case of a defined contribution plan, are either in equal dollar amounts for all employees covered by the plan or bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employees covered by the plan (and an equivalent requirement is met with respect to a defined benefit plan).

`(B) COMPENSATION LIMITATION- The compensation taken into account under subparagraph (A) for any year shall not exceed the limitation in effect for such year under section 401(a)(17).

`(3) VESTING REQUIREMENTS- The requirements of this paragraph are met if the plan satisfies the requirements of either of the following subparagraphs:

`(A) 3-year VESTING- A plan satisfies the requirements of this subparagraph if an employee who has completed at least 3 years of service has a nonforfeitable right to 100 percent of the employee's accrued benefit derived from employer contributions.

`(B) 5-year GRADED VESTING- A plan satisfies the requirements of this subparagraph if an employee has a nonforfeitable right to a percentage of the employee's accrued benefit derived from employer contributions determined under the following table:

The nonforfeitable

`Years of service:

percentage is:

100.

`(4) DISTRIBUTION REQUIREMENTS- In the case of a profit-sharing or stock bonus plan, the requirements of this paragraph are met if, under the plan, qualified employer contributions are distributable only as provided in section 401(k)(2)(B).

`(e) Other Definitions- For purposes of this section--

`(1) ELIGIBLE EMPLOYER-

`(A) IN GENERAL- The term `eligible employer' means, with respect to any year, an employer which has no more than 25 employees who received at least $5,000 of compensation from the employer for the preceding year.

`(B) REQUIREMENT FOR NEW QUALIFIED EMPLOYER PLANS- Such term shall not include an employer if, during the 3-taxable year period immediately preceding the 1st taxable year for which the credit under this section is otherwise allowable for a qualified employer plan of the employer, the employer or any member of any controlled group including the employer (or any predecessor of either) established or maintained a qualified employer plan with respect to which contributions were made, or benefits were accrued, for substantially the same employees as are in the qualified employer plan.

`(2) HIGHLY COMPENSATED EMPLOYEE- The term `highly compensated employee' has the meaning given such term by section 414(q) (determined without regard to section 414(q)(1)(B)(ii)).

`(f) Special Rules-

`(1) DISALLOWANCE OF DEDUCTION- No deduction shall be allowed for that portion of the qualified employer contributions paid or incurred for the taxable year which is equal to the credit determined under subsection (a).

`(2) ELECTION NOT TO CLAIM CREDIT- This section shall not apply to a taxpayer for any taxable year if such taxpayer elects to have this section not apply for such taxable year.

`(3) AGGREGATION RULES- All persons treated as a single employer under subsection (a) or (b) of section 52, or subsection (n) or (o) of section 414, shall be treated as one person. All eligible employer plans shall be treated as 1 eligible employer plan.

`(g) Recapture of Credit on Forfeited Contributions-

`(1) IN GENERAL- Except as provided in paragraph (2), if any accrued benefit which is forfeitable by reason of subsection (d)(3) is forfeited, the employer's tax imposed by this chapter for the taxable year in which the forfeiture occurs shall be increased by 35 percent of the employer contributions from which such benefit is derived to the extent such contributions were taken into account in determining the credit under this section.

`(2) REALLOCATED CONTRIBUTIONS- Paragraph (1) shall not apply to any contribution which is reallocated by the employer under the plan to employees who are not highly compensated employees.'.

(b) Credit Allowed as Part of General Business Credit- Section 38(b) of the Internal Revenue Code of 1986 (defining current year business credit) is amended by striking `plus' at the end of paragraph (29), by striking the period at the end of paragraph (30) and inserting `, plus', and by adding at the end the following new paragraph:

`(31) in the case of an eligible employer (as defined in section 45E(e)), the small employer pension plan contribution credit determined under section 45M(a).'

(1) Subsection (c) of section 196 of the Internal Revenue Code of 1986 is amended by striking `and' at the end of paragraph (12), by striking the period at the end of paragraph (13) and inserting `, and', and by adding at the end the following new paragraph:

`(14) the small employer pension plan contribution credit determined under section 45E(a).'

(2) The table of sections for subpart D of part IV of subchapter A of chapter 1 of such Code is amended by adding at the end the following new item:

`Sec. 45M. Small employer pension plan contributions.'.

(d) Effective Date- The amendments made by this section shall apply to contributions paid or incurred in taxable years beginning after December 31, 2006.

SEC. 302. DEDUCTION FOR PENSION CONTRIBUTIONS ALLOWED IN COMPUTING NET EARNINGS FROM SELF-EMPLOYMENT.

(a) In General- Section 1402(a) of the Internal Revenue Code of 1986 (defining net earnings from self-employment) is amended by striking `and' at the end of paragraph (15), by striking the period at the end of paragraph (16) and inserting `, and', and by inserting after paragraph (16) the following new paragraph:

`(17) any deduction allowed under section 404 by reason of section 404(a)(8)(C) shall be allowed, except that the amount of such deduction shall be determined without regard to this paragraph.'.

(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

TITLE IV--HEALTH INSURANCE COSTS PARITY

SEC. 401. DEDUCTION FOR HEALTH INSURANCE COSTS ALLOWED IN COMPUTING NET EARNINGS FROM SELF-EMPLOYMENT.

(a) In General- Section 1402(a) of the Internal Revenue Code of 1986 (defining net earnings from self-employment), as amended by section 302, is amended by striking `and' at the end of paragraph (16), by striking the period at the end of paragraph (17) and inserting `, and', and by inserting after paragraph (17) the following new paragraph:

`(18) any deduction allowed under section 162(l) shall be allowed.'.

(b) Conforming Amendment- Section 162(l) of the Internal Revenue Code of 1986 (relating to special rule for health insurance costs of self-employed individuals) is amended by striking paragraph (4) and by redesignating paragraph (5) as paragraph (4).

END