[Congressional Bills 109th Congress]
[From the U.S. Government Publishing Office]
[S. 3857 Introduced in Senate (IS)]








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.''.
    (c) Other Conforming Amendments.--
            (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
                    (C) by redesignating subparagraph (D) as 
                subparagraph (C).
            (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
                    (C) by adding at the end the following new 
                paragraph:
            ``(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.''.
    (c) Application of Other Withholding Tax Rules on Nonresident Alien 
Shareholders.--
            (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.''.
    (c) Effective Date.--The amendments made by this section shall take 
effect on the date of the enactment of this Act.

             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:
    1.............................................                  20 
    2.............................................                  40 
    3.............................................                  60 
    4.............................................                  80 
    5.............................................                 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).''
    (c) Conforming Amendments.--
            (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).
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2006.
                                 <all>