U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007/Title VIII/Subtitle B/Part 1

==PART 1 — SMALL BUSINESS TAX RELIEF PROVISIONS==

Subpart A — General Provisions.

Sec. 8211. Extension and Modification of Work Opportunity Tax Credit.

(a) Extension.—

Section 51(c)(4)(B) (relating to termination) is amended by striking "December 31, 2007" and inserting "August 31, 2011".

(b) Increase in Maximum Age for Designated Community Residents.—

(1) In general.—

Paragraph (5) of section 51(d) is amended to read as follows:

"(5) Designated community residents.—

"(A) In general.—The term `designated community resident' means any individual who is certified by the designated local agency—

"(i) as having attained age 18 but not age 40 on the hiring date, and

"(ii) as having his principal place of abode within an empowerment zone, enterprise community, renewal community, or rural renewal county.

"(B) Individual must continue to reside in zone, community, or county.—In the case of a designated community resident, the term `qualified wages' shall not include wages paid or incurred for services performed while the individual's principal place of abode is outside an empowerment zone, enterprise community, renewal community, or rural renewal county.

"(C) Rural renewal county.—For purposes of this paragraph, the term `rural renewal county' means any county which—

"(i) is outside a metropolitan statistical area (defined as such by the Office of Management and Budget), and

"(ii) during the 5-year periods 1990 through 1994 and 1995 through 1999 had a net population loss.".

(2) Conforming amendment.—Subparagraph (D) of section 51(d)(1) is amended to read as follows:

"(D) a designated community resident,".

(c) Clarification of Treatment of Individuals Under Individual Work Plans.—

Subparagraph (B) of section 51(d)(6) (relating to vocational rehabilitation referral) is amended by striking "or" at the end of clause (i), by striking the period at the end of clause (ii) and inserting ", or", and by adding at the end the following new clause:

"(iii) an individual work plan developed and implemented by an employment network pursuant to subsection (g) of section 1148 of the Social Security Act with respect to which the requirements of such subsection are met.".

(d) Treatment of Disabled Veterans Under the Work Opportunity Tax Credit.—

(1) Disabled veterans treated as members of targeted group.—

(A) In general.—

Subparagraph (A) of section 51(d)(3) (relating to qualified veteran) is amended by striking "agency as being a member of a family" and all that follows and inserting "agency as—

"(i) being a member of a family receiving assistance under a food stamp program under the Food Stamp Act of 1977 for at least a 3-month period ending during the 12-month period ending on the hiring date, or

"(ii) entitled to compensation for a service-connected disability, and—

"(I) having a hiring date which is not more that 1 year after having been discharged or released from active duty in the Armed Forces of the United States, or

"(II) having aggregate periods of unemployment during the 1-year period ending on the hiring date which equal or exceed 6 months.".

(B) Definitions.—

Paragraph (3) of section 51(d) is amended by adding at the end the following new subparagraph:

"(C) Other definitions.—For purposes of subparagraph (A), the terms `compensation' and `service-connected' have the meanings given such terms under section 101 of title 38, United States Code.".

(2) Increase in amount of wages taken into account for disabled veterans.—

Paragraph (3) of section 51(b) is amended—

(A) by inserting "($12,000 per year in the case of any individual who is a qualified veteran by reason of subsection (d)(3)(A)(ii))" before the period at the end, and

(B) by striking "Only first $6,000 of" in the heading and inserting "Limitation on".

(e) Effective Date.—

The amendments made by this section shall apply to individuals who begin work for the employer after the date of the enactment of this Act.

Sec. 8212. Extension and Increase of Expensing for Small Business.

(a) Extension.—

Subsections (b)(1), (b)(2), (b)(5), (c)(2), and (d)(1)(A)(ii) of section 179 (relating to election to expense certain depreciable business assets) are each amended by striking "2010" and inserting "2011".

(b) Increase in Limitations.—

Subsection (b) of section 179 is amended—

(1) by striking "$100,000 in the case of taxable years beginning after 2002" in paragraph (1) and inserting "$125,000 in the case of taxable years beginning after 2006", and

(2) by striking "$400,000 in the case of taxable years beginning after 2002" in paragraph (2) and inserting "$500,000 in the case of taxable years beginning after 2006".

(c) Inflation Adjustment.—

Subparagraph (A) of section 179(b)(5) is amended—

(1) by striking "2003" and inserting "2007",

(2) by striking "$100,000 and $400,000" and inserting "$125,000 and $500,000", and

(3) by striking "2002" in clause (ii) and inserting "2006".

(d) Effective Date.—

The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

Sec. 8213. Determination of Credit for Certain Taxes Paid With Respect to Employee Cash Tips.

(a) In General.—

Subparagraph (B) of section 45B(b)(1) is amended by inserting "as in effect on January 1, 2007, and" before "determined without regard to".

(b) Effective Date.—

The amendment made by this section shall apply to tips received for services performed after December 31, 2006.

Sec. 8214. Waiver of Individual and Corporate Alternative Minimum Tax Limits on Work Opportunity Credit and Credit for Taxes Paid with Respect to Employee Cash Tips.

(a) Allowance Against Alternative Minimum Tax.—

Subparagraph (B) of section 38(c)(4) is amended by striking "and" at the end of clause (i), by inserting a comma at the end of clause (ii), and by adding at the end the following new clauses:

"(iii) the credit determined under section 45B, and

"(iv) the credit determined under section 51.".

(b) Effective Date.—

The amendments made by this section shall apply to credits determined under sections 45B and 51 of the Internal Revenue Code of 1986 in taxable years beginning after December 31, 2006, and to carrybacks of such credits.

Sec. 8215. Family Business Tax Simplification.

(a) In General.—

Section 761 (defining terms for purposes of partnerships) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:

"(f) Qualified Joint Venture.—

"(1) In general.—In the case of a qualified joint venture conducted by a husband and wife who file a joint return for the taxable year, for purposes of this title—

"(A) such joint venture shall not be treated as a partnership,

"(B) all items of income, gain, loss, deduction, and credit shall be divided between the spouses in accordance with their respective interests in the venture, and

"(C) each spouse shall take into account such spouse's respective share of such items as if they were attributable to a trade or business conducted by such spouse as a sole proprietor.

"(2) Qualified joint venture.—For purposes of paragraph (1), the term `qualified joint venture' means any joint venture involving the conduct of a trade or business if—

"(A) the only members of such joint venture are a husband and wife,

"(B) both spouses materially participate (within the meaning of section 469(h) without regard to paragraph (5) thereof) in such trade or business, and

"(C) both spouses elect the application of this subsection.".

(b) Net Earnings From Self-Employment.—

(1) Subsection (a) of section 1402 (defining net earnings from self-employment) is amended by striking ", and" at the end of paragraph (15) and inserting a semicolon, by striking the period at the end of paragraph (16) and inserting "; and", and by inserting after paragraph (16) the following new paragraph:

"(17) notwithstanding the preceding provisions of this subsection, each spouse's share of income or loss from a qualified joint venture shall be taken into account as provided in section 761(f) in determining net earnings from self-employment of such spouse.".

(2) Subsection (a) of section 211 of the Social Security Act (defining net earnings from self-employment) is amended by striking "and" at the end of paragraph (14), by striking the period at the end of paragraph (15) and inserting "; and", and by inserting after paragraph (15) the following new paragraph:

"(16) Notwithstanding the preceding provisions of this subsection, each spouse's share of income or loss from a qualified joint venture shall be taken into account as provided in section 761(f) of the Internal Revenue Code of 1986 in determining net earnings from self-employment of such spouse.".

(c) Effective Date.—

The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

Subpart B — Gulf Opportunity Zone Tax Incentives

Sec. 8221. Extension of Increased Expensing for Qualified Section 179 Gulf Opportunity Zone Property.

Paragraph (2) of section 1400N(e) (relating to qualified section 179 Gulf Opportunity Zone property) is amended—

(1) by striking "this subsection, the term" and inserting:

"this subsection—

"(A) In general.—The term", and

(2) by adding at the end the following new subparagraph:

"(B) Extension for certain property.—In the case of property substantially all of the use of which is in one or more specified portions of the GO Zone (as defined by subsection (d)(6)), such term shall include section 179 property (as so defined) which is described in subsection (d)(2), determined—

"(i) without regard to subsection (d)(6), and

"(ii) by substituting `2008' for `2007' in subparagraph (A)(v) thereof.".

Sec. 8222. Extension and Expansion of Low-Income Housing Credit Rules for Buildings in the Go Zones.

(a) Time for Making Low-Income Housing Credit Allocations.—

Subsection (c) of section 1400N (relating to low-income housing credit) is amended by redesignating paragraph (5) as paragraph (6) and by inserting after paragraph (4) the following new paragraph:

"(5) Time for making low-income housing credit allocations.—Section 42(h)(1)(B) shall not apply to an allocation of housing credit dollar amount to a building located in the Gulf Opportunity Zone, the Rita GO Zone, or the Wilma GO Zone, if such allocation is made in 2006, 2007, or 2008, and such building is placed in service before January 1, 2011.".

(b) Extension of Period for Treating GO Zones as Difficult Development Areas.—

(1) In general.—

Subparagraph (A) of section 1400N(c)(3) is amended by striking "2006, 2007, or 2008" and inserting "the period beginning on January 1, 2006, and ending on December 31, 2010".

(2) Conforming amendment.—

Clause (ii) of section 1400N(c)(3)(B) is amended by striking "such period" and inserting "the period described in subparagraph (A)".

(c) Community Development Block Grants Not Taken Into Account in Determining if Buildings Are Federally Subsidized.—

Subsection (c) of section 1400N (relating to low-income housing credit), as amended by this Act, is amended by redesignating paragraph (6) as paragraph (7) and by inserting after paragraph (5) the following new paragraph:

"(6) Community development block grants not taken into account in determining if buildings are federally subsidized.—

"For purpose of applying section 42(i)(2)(D) to any building which is placed in service in the Gulf Opportunity Zone, the Rita GO Zone, or the Wilma GO Zone during the period beginning on January 1, 2006, and ending on December 31, 2010, a loan shall not be treated as a below market Federal loan solely by reason of any assistance provided under section 106, 107, or 108 of the Housing and Community Development Act of 1974 by reason of section 122 of such Act or any provision of the Department of Defense Appropriations Act, 2006, or the Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Hurricane Recovery, 2006.".

Sec. 8223. Special Tax-Exempt Bond Financing Rule for Repairs and Reconstructions of Residences In the Go Zones.

Subsection (a) of section 1400N (relating to tax-exempt bond financing) is amended by adding at the end the following new paragraph:

"(7) Special rule for repairs and reconstructions.—

"(A) In general.—For purposes of section 143 and this subsection, any qualified GO Zone repair or reconstruction shall be treated as a qualified rehabilitation.

"(B) Qualified go zone repair or reconstruction.

"For purposes of subparagraph (A), the term `qualified GO Zone repair or reconstruction' means any repair of damage caused by Hurricane Katrina, Hurricane Rita, or Hurricane Wilma to a building located in the Gulf Opportunity Zone, the Rita GO Zone, or the Wilma GO Zone (or reconstruction of such building in the case of damage constituting destruction) if the expenditures for such repair or reconstruction are 25 percent or more of the mortgagor's adjusted basis in the residence. For purposes of the preceding sentence, the mortgagor's adjusted basis shall be determined as of the completion of the repair or reconstruction or, if later, the date on which the mortgagor acquires the residence.

"(C) Termination.—This paragraph shall apply only to owner-financing provided after the date of the enactment of this paragraph and before January 1, 2011.".

Sec. 8224. GAO Study of Practices Employed by State and Local Governments in Allocating and Utilizing Tax Incentives Provided Pursuant to the Gulf Opportunity Zone Act of 2005.

(a) In General.—

The Comptroller General of the United States shall conduct a study of the practices employed by State and local governments, and subdivisions thereof, in allocating and utilizing tax incentives provided pursuant to the Gulf Opportunity Zone Act of 2005 and this Act.

(b) Submission of Report.—

Not later than one year after the date of the enactment of this Act, the Comptroller General shall submit a report on the findings of the study conducted under subsection (a) and shall include therein recommendations (if any) relating to such findings. The report shall be submitted to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate.

(c) Congressional Hearings.—

In the case that the report submitted under this section includes findings of significant fraud, waste or abuse, each Committee specified in subsection (b) shall, within 60 days after the date the report is submitted under subsection (b), hold a public hearing to review such findings.

Subpart C — Subchapter S Provisions

Sec. 8231. Capital Gain of S Corporation Not Treated as Passive Investment Income.

(a) In General.—

Section 1362(d)(3) is amended by striking subparagraphs (B), (C), (D), (E), and (F) and inserting the following new subparagraphs:

"(B) Gross receipts from the sales of certain assets.—For purposes of this paragraph—

"(i) in the case of dispositions of capital assets (other than stock and securities), gross receipts from such dispositions shall be taken into account only to the extent of the capital gain net income therefrom, and

"(ii) in the case of sales or exchanges of stock or securities, gross receipts shall be taken into account only to the extent of the gains therefrom.

"(C) Passive investment income defined.—

"(i) In general.—Except as otherwise provided in this subparagraph, the term `passive investment income' means gross receipts derived from royalties, rents, dividends, interest, and annuities.

"(ii) 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).

"(iii) 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)).

"(iv) 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.

"(v) Exception for banks, etc.—In the case of a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), 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.".

(b) Effective Date.—

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

Sec. 8232. Treatment of Bank Director Shares.

(a) In General.—

Section 1361 (defining S corporation) is amended by adding at the end the following new subsection:

"(f) Restricted Bank Director Stock.—

"(1) In general.—Restricted bank director stock shall not be taken into account as outstanding stock of the S corporation in applying this subchapter (other than section 1368(f)).

"(2) Restricted bank director stock.—For purposes of this subsection, the term `restricted bank director stock' means stock in a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), if such stock—

"(A) is required to be held by an individual under applicable Federal or State law in order to permit such individual to serve as a director, and

"(B) is subject to an agreement with such bank or company (or a corporation which controls (within the meaning of section 368(c)) such bank or company) pursuant to which the holder is required to sell back such stock (at the same price as the individual acquired such stock) upon ceasing to hold the office of director.

"(3) Cross reference.—

"For treatment of certain distributions with respect to restricted bank director stock, see section 1368(f).".

(b) Distributions.—

Section 1368 (relating to distributions) is amended by adding at the end the following new subsection:

"(f) Restricted Bank Director Stock.—If a director receives a distribution (not in part or full payment in exchange for stock) from an S corporation with respect to any restricted bank director stock (as defined in section 1361(f)), the amount of such distribution—

"(1) shall be includible in gross income of the director, and

"(2) shall be deductible by the corporation for the taxable year of such corporation in which or with which ends the taxable year in which such amount in included in the gross income of the director.".

(c) Effective Dates.—

(1) In general.—

The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

(2) Special rule for treatment as second class of stock.—

In the case of any taxable year beginning after December 31, 1996, restricted bank director stock (as defined in section 1361(f) of the Internal Revenue Code of 1986, as added by this section) shall not be taken into account in determining whether an S corporation has more than 1 class of stock.

Sec. 8233. Special Rule for Bank Required to Change from the Reserve Method of Accounting on Becoming S Corporation.

(a) In General.—

Section 1361, as amended by this Act, is amended by adding at the end the following new subsection:

"(g) Special Rule for Bank Required To Change From the Reserve Method of Accounting on Becoming S Corporation.—In the case of a bank which changes from the reserve method of accounting for bad debts described in section 585 or 593 for its first taxable year for which an election under section 1362(a) is in effect, the bank may elect to take into account any adjustments under section 481 by reason of such change for the taxable year immediately preceding such first taxable year.".

(b) Effective Date.—

The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

Sec. 8234. Treatment of the Sale of Interest in a Qualified Subchapter S Subsidiary.

(a) In General.—

Subparagraph (C) of section 1361(b)(3) (relating to treatment of terminations of qualified subchapter S subsidiary status) is amended—

(1) by striking "For purposes of this title," and inserting the following:

"(i) In general.—For purposes of this title,", and

(2) by inserting at the end the following new clause:

"(ii) Termination by reason of sale of stock.—If the failure to meet the requirements of subparagraph (B) is by reason of the sale of stock of a corporation which is a qualified subchapter S subsidiary, the sale of such stock shall be treated as if—

"(I) the sale were a sale of an undivided interest in the assets of such corporation (based on the percentage of the corporation's stock sold), and

"(II) the sale were followed by an acquisition by such corporation of all of its assets (and the assumption by such corporation of all of its liabilities) in a transaction to which section 351 applies.".

(b) Effective Date.—

The amendments made by this section shall apply to taxable years beginning after December 31, 2006.

Sec. 8235. Elimination of All Earnings and Profits Attributable to Pre-1983 Years for Certain Corporations.

In the case of a corporation which is—

(1) described in section 1311(a)(1) of the Small Business Job Protection Act of 1996, and

(2) not described in section 1311(a)(2) of such Act, the amount of such corporation's accumulated earnings and profits (for the first taxable year beginning after the date of the enactment of this Act) shall be reduced by an amount equal to the portion (if any) of such accumulated earnings and profits which were accumulated in any taxable year beginning before January 1, 1983, for which such corporation was an electing small business corporation under subchapter S of the Internal Revenue Code of 1986.

Sec. 8236. Deductibility of Interest Expense on Indebtedness Incurred by an Electing Small Business Trust to Acquire S Corporation Stock.

(a) In General.—

Subparagraph (C) of section 641(c)(2) (relating to modifications) is amended by inserting after clause (iii) the following new clause:

"(iv) Any interest expense paid or accrued on indebtedness incurred to acquire stock in an S corporation.".

(b) Effective Date.—

The amendment made by this section shall apply to taxable years beginning after December 31, 2006.