[Congressional Record Volume 152, Number 108 (Wednesday, September 6, 2006)]
[Senate]
[Pages S9057-S9060]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. SMITH (for himself and Mrs. Lincoln):
  S. 3857. A bill to amend the Internal Revenue Code of 1986 to provide 
incentives to small businesses; to the Committee on Finance.
  Mr. SMITH. Mr. President, I rise today to introduce the ``Bringing 
Opportunity to Our Small Business Taxpayers Act,'' or ``BOOST Act.'' I 
am pleased to be joined by my colleague Senator Blanche Lincoln of 
Arkansas.
  Small businesses represent over 99 percent of all employers and 
create approximately three-fourths of the new jobs added to the 
economy. The approximately 23 million small businesses truly are the 
backbone of our economy.
  However, this important engine of job creation and growth for our 
economy is subjected to unnecessary and unfair financial burdens 
inflicted by Federal tax policy and other laws. My bill will extend 
expensing provisions, eliminate tax inequities and encourage retirement 
plans for small businesses, as well as provide a health insurance tax 
deduction for the self-employed.
  Current law allows small businesses to expense up to $100,000 of the 
cost of property per year and invest up to $400,000 per year and still 
be eligible for expensing. My bill will make these expensing 
provisions, which are set to expire in 2009, permanent.
  My legislation also addresses inequitable provisions in the law that 
affect the approximately 3.2 million S-corporations in the United 
States. Today, businesses that convert from C-corporation to S-
corporation status are penalized for a period of ten years if they sell 
assets that were held prior to the conversion, even if the proceeds are 
driven right back into the business. By reducing the holding period 
subjected to built-in gains tax from ten years to seven years, S-
corporations will be able to unload unneeded assets and improve cash 
flow and create more jobs.
  Known as the ``sting tax,'' S-corporations that have converted from 
C-corporation status are taxed at the maximum corporate tax rate for 
passive investment income in excess of 25 percent of their gross 
receipts. This law is burdensome and unfair and needs to be revised. My 
bill will decrease the amount of income subjected to the tax. The 
adjustment will relieve S-corporations from an unnecessary tax burden 
and level the playing field with C-corporations and LLCs.
  Saving for retirement is important for all Americans and access to 
retirement plans is critical in order to build wealth for an 
individual's golden years. Unfortunately, high costs and taxes 
discourage many small businesses from providing retirement plans to 
their employees. Through tax equity and tax credit measures, my bill 
encourages small businesses to offer retirement benefits to employees 
so they will have the necessary tools to prepare for their financial 
future.
  I look forward to working with my colleagues on issues affecting 
small businesses and urge their support of my legislation.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 3857

       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''.

[[Page S9058]]

       (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

[[Page S9059]]

     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).

[[Page S9060]]

       ``(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.
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