National Enterprise Zones

(a)

In general

Subchapter Y of chapter 1 of the Internal Revenue Code of 1986 is amended by adding at the end the following new part:

III

National Enterprise Zones

Sec. 1400U. National Enterprise Zone designation procedure.

Sec. 1400U–1. National Enterprise Zone eligibility criteria.

Sec. 1400U–2. Effect of National Enterprise Zone designation on individuals, estates and trusts conducting an active trade or business within a national enterprise zone.

Sec. 1400U–3. National Enterprise Zone individual taxable income.

Sec. 1400U–4. Effect of National Enterprise Zone designation on corporations.

Sec. 1400U–5. National Enterprise Zone corporate taxable income.

Sec. 1400U–6. Conduct of an active trade or business within a National Enterprise Zone by corporations, partnerships, and sole proprietors.

Sec. 1400U–7. Definitions and special rules.

1400U.

National Enterprise Zone designation procedure

(a)

Designated zone

The Secretary shall designate the areas in the United States and possessions of the United States that meet the requirements of section 1400U–1 and publish a list of such designated zones. (b)

Effective date of zone designation

The effective date of the designation of any zone as a National Enterprise Zone pursuant to this section shall be January 1 of the year following its designation. (c)

Eligibility review

Between January 1 and April 30 of the year after the release of the decennial census, the Secretary shall undertake a review of each National Enterprise Zone designation whereby the Secretary shall determine whether the zone continues to meet the National Enterprise Zone Eligibility Criteria established by section 1400U–1. If this review determines that a National Enterprise Zone no longer meets the National Enterprise Zone Eligibility Criteria established by section 1400U–1, then the Secretary shall revoke the designation effective at the end of the calendar year. Not later than June 30 after said determination, the Secretary shall issue a notice to all taxpayers making National Enterprise Zone elections with respect to said zone in the taxpayer’s previous taxable year that the designation will be revoked at the end of the calendar year for said National Enterprise Zone. The Secretary shall publish the decennial eligibility review results for all National Enterprise Zones no later than June 30. (d)

Effect of revocation of designation

An electing taxpayer with respect to a National Enterprise Zone whose designation is revoked continues to qualify for the Individual or Corporate Alternative National Enterprise Zone tax under sections 1400U–2 and 1400U–4 until the end of the taxpayer’s 12th taxable year following the year of zone designation revocation.

1400U–1.

National Enterprise Zone eligibility criteria

(a)

National enterprise zone eligibility criteria

A National Enterprise Zone must— (1)have greater than 50,000 residents; (2)have a poverty rate two times the national poverty rate; and (3)have an unemployment rate 2 times the national average unemployment rate. (b)

No overlap with existing zones of different type

No part of a National Enterprise Zone may also be a part of an Empowerment Zone, Enterprise Community (Subchapter U zones), or District of Columbia Enterprise Zone (Subchapter W zones).

1400U–2.

Effect of National Enterprise Zone designation on individuals, estates and trusts conducting an active trade or business within a national enterprise zone

(a)

Individual alternative national enterprise zone tax

In the case of a taxpayer other than a corporation, if, for any taxable year, the taxpayer has National Enterprise Zone individual taxable income, then, in lieu of any tax imposed by section 1 or section 55, the taxpayer may elect to pay a tax which shall consist of the sum of— (1)a tax computed on the taxpayer’s taxable income reduced by the amount of National Enterprise Zone tentative individual taxable income (if greater than zero), at the rates and in the manner as if this subsection had not been enacted, plus (2)a tax of 12 percent of the National Enterprise Zone individual taxable income. (b)

Years for which election is effective

An election under subsection (a) shall be effective for the three taxable years of the electing taxpayer following the year in which the election is made and for all succeeding taxable years of such taxpayer, unless— (1)the taxpayer ceases to have National Enterprise Zone taxable income, (2)the taxpayer revokes the election (after the initial three-year period), or (3)the period described in section 1400U(d) has expired. (c)

Effect of cessation of business operations in zone during initial three-year period

If a taxpayer has made an election under this section and if such election has been terminated or revoked under subsection (b)(1) due to cessation of business in the zone during any of the three years immediately after the year in which the election is made, such taxpayer shall be treated as having been subject to tax under chapter 1 at the otherwise applicable rate for individuals for the years the alternative National Enterprise Zone tax was applicable. (d)

New election following termination

If a taxpayer has made an election under this section and if such election has been terminated or revoked under subsection (b), such taxpayer shall not be eligible to make an election under this section for any taxable year before the 3rd taxable year which begins after the 1st taxable year for which such termination is effective, unless the Secretary consents to such election.

1400U–3.

National Enterprise Zone individual taxable income

(a)

National enterprise zone individual tentative taxable income

National Enterprise Zone tentative individual taxable income shall be equal to taxable income (as defined by section 63 without regard to section 179(e)) arising from the conduct of an active trade or business (as defined in section 1400U–6) within one or more National Enterprise Zones. (b)

National enterprise zone individual taxable income adjustments

National Enterprise Zone individual taxable income shall be equal to National Enterprise Zone individual tentative taxable income less— (1)expenditures made to acquire inventory property held in a National Enterprise Zone, and (2)the amount, if any, the taxpayer elects to deduct pursuant to section 179(e) that exceeds the limitations in section 179(b).

1400U–4.

Effect of National Enterprise Zone designation on corporations

(a)

Corporate alternative national enterprise zone tax

In the case of a corporation (other than an S corporation), if for any taxable year, the taxpayer has National Enterprise Zone corporate taxable income, then, in lieu of any tax imposed by section 11 or section 55, the taxpayer may elect to pay a tax which shall consist of the sum of— (1)a tax computed on taxable income reduced by the amount of National Enterprise Zone tentative corporate taxable income (if greater than zero) at the rates and in the manner as if this subsection had not been enacted, plus (2)a tax of 12 percent of the National Enterprise Zone corporate taxable income. (b)

Special rule for non-domestic corporations

In the case of an electing corporation organized under the laws of a possession of the United States doing business in a National Enterprise Zone, this section shall apply as if such corporation were a domestic corporation subject to tax under this title. (c)

Years for which election is effective

An election under subsection (a) shall be effective for the three taxable years of the electing corporation following the year in which the election is made and for all succeeding taxable years of such corporation, unless— (1)the corporation ceases to have National Enterprise Zone taxable income, (2)the corporation revokes the election, or (3)the period described in section 1400U(d) has expired. (d)

Effect of cessation of business operations in zone during initial three-year period

If a taxpayer has made an election under this section and if such election has been terminated or revoked under subsection (c)(1) due to cessation of business in the zone during any of the three years immediately after the year in which the election is made, such taxpayer shall be treated as having been subject to tax under chapter 1 at the otherwise applicable rate for domestic corporations for the years the alternative National Enterprise Zone tax was applicable. (e)

New election by national enterprise zone corporation following termination

If an electing corporation has made an election under this section and if such election has been terminated or revoked under subsection (c), such corporation (and any successor corporation) shall not be eligible to make an election under this section for any taxable year before the 3rd taxable year which begins after the 1st taxable year for which such termination is effective, unless the Secretary consents to such election.

1400U–5.

National Enterprise Zone corporate taxable income

(a)

In general

National Enterprise Zone corporate tentative corporate taxable income shall be taxable income (without regard to section 179(e)) arising from the conduct of an active trade or business within one or more National Enterprise Zones. (b)

Adjustments

National Enterprise Zone corporate taxable income shall be equal to National Enterprise Zone corporate tentative taxable income less— (1)expenditures made to acquire inventory property held in a National Enterprise Zone, and (2)the amount, if any, the taxpayer elects to deduct pursuant to 179(e) that exceeds the limitations in section 179(b).

1400U–6.

Conduct of an active trade or business within a National Enterprise Zone by corporations, partnerships, and sole proprietors

(a)

Active trade or business

For purposes of this part, the conduct of active trade or business means the conduct of a trade or business that derives no more than 25 percent of its gross income from passive activities (as defined by section 469). (b)

Income and expenses within a national enterprise zone

For purposes of this part— (1)

Gross income

Gross income from within a National Enterprise Zone shall mean— (A)compensation for labor or services performed by the electing corporation, partnership, or sole proprietor within a National Enterprise Zone; (B)rentals or royalties from property located in a National Enterprise Zone; (C)gains, profits, and income derived from the sale of inventory property held within a National Enterprise Zone; and (D)income from the sale of property that is produced, created, fabricated, manufactured, extracted, processed, cured, aged, grown or harvested within the National Enterprise Zone. (2)

Expenses

Expenses shall be allocated and apportioned to the income producing activities to which they are related. Expenses which are not allocable or apportioned to any specific income producing activities shall be allocated on the basis of gross income such that the ratio of the expense allocated to the National Enterprise Zone is the same as the ratio of gross income within the National Enterprise Zone to all gross income within the United States and a possession of the United States of the taxpayer or controlled group (in the case of a corporation that is a member of a controlled group of corporations as defined in section 1563(a)). (c)

Alternative formulary method

(1)

In general

A corporation (or controlled group in the case of a corporation that is a member of a controlled group of corporations (as defined in section 1563(a))), partnership, or sole proprietor that so elects, in a form and manner prescribed by the Secretary, may determine the share of its income, expense, and other items attributable to the conduct of an active trade or business within a National Enterprise Zone by multiplying its apportionment ratio by the amount of the income, expense, and other items for purposes of determining its National Enterprise Zone corporate taxable income. (2)

Apportionment ratio

The apportionment ratio shall be the ratio of— (A)the sum of the remaining basis in depreciable property held in a National Enterprise Zone for the entire taxable year, of the inventory property held in a National Enterprise Zone at the end of the taxable year, and of the compensation paid to National Enterprise Zone-based employees during the taxable year, and (B)the sum of the remaining basis in depreciable property held in the United States and its possessions for the entire taxable year, of the inventory property held in the United States and its possessions at the end of the taxable year, and of the compensation paid to employees within the United States and its possessions during the taxable year. (3)

Mandatory use of alternative formulary method

If a taxpayer— (A)derives greater than 10 percent of its gross income from sales to related parties (as defined in section 1313(c)), or (B)expenses attributable to purchases from related parties (as defined in section 1313(c)) account for greater than 10 percent of its expenses, then said taxpayer shall use the alternative formulary method.

1400U–7.

Definitions and special rules

For purposes of this part— (1)

Possession of the United States

The term possession of the United States means the Virgin Islands, Guam, American Samoa, the Commonwealth of Puerto Rico, and the Commonwealth of the Northern Mariana Islands. (2)

Inventory

(A)

Inventory property

The term inventory property means property described in section 1221(a)(1) and any expenditures that were capitalized pursuant to section 263A. (B)

No double counting

The deduction afforded by section 1400U–3(b)(1) is in lieu of the deduction provided upon the sale of inventory property. (3)

Special rule

For purposes of a corporation making an election under this part, section 7701(a)(4) shall include an electing corporation organized under the laws of a possession of the United States and section 7701(a)(5) shall not apply.

(b)

Conforming amendments

Section 179 of the Internal Revenue Code of 1986 is amended by inserting at the end the following new subsection:

(e)

No limitation on amount in national enterprise zones

(1)

In general

The limitations of subsection (b) shall not apply with respect to property placed in service in a National Enterprise Zone. (2)

Property removed from national enterprise zone

Property expensed pursuant to this section that is removed from service within a National Enterprise Zone but not disposed of by the taxpayer shall be treated as if it had been, as of the date of the removal, disposed of by the taxpayer and repurchased by the taxpayer at a price equal to what its remaining basis would have been if the election under this section had not been exercised with respect to the property.

(c)

Clerical amendment

The table of parts for subchapter Y of chapter 1 of such Code is amended by inserting after the item relating to part II the following new item:

Part III. National Enterprise Zones.