To amend the Internal Revenue Code of 1986 to increase expensing for small business and to allow small business to elect to determine the deduction for depreciation on a neutral cost recovery basis for property otherwise eligible to be expensed.

Summary: Neutral Cost Recovery Act for Small Business - Amends the Internal Revenue Code to: (1) provide for increased expensing for small businesses; and (2) require that the depreciation deduction for certain property placed in service after 2003 be computed using neutral cost recovery ratios.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Neutral Cost Recovery Act for Small 
Business''.

SEC. 2. INCREASED EXPENSING FOR SMALL BUSINESS.

    (a) In General.--Paragraph (1) of section 179(b) of the Internal 
Revenue Code of 1986 (relating to dollar limitation) is amended to read 
as follows:
            ``(1) Dollar limitation.--The aggregate cost which may be 
        taken into account under subsection (a) for any taxable year 
        shall not exceed $75,000. The dollar amount otherwise 
        applicable under the preceding sentence for any taxable year 
        shall be reduced by the basis of property which is placed in 
        service during such year and which is taken into account under 
        section 168(k).''.
    (b) Increase in Phaseout Threshold.--Paragraph (2) of section 
179(b) of such Code (relating to reduction in limitation) is amended by 
striking ``$200,000'' and inserting ``$325,000''.
    (c) Certain Computer Software.--Paragraph (1) of section 179(d) of 
such Code (defining section 179 property) is amended to read as 
follows:
            ``(1) Section 179 property.--For purposes of this section, 
        the term `section 179 property' means property--
                    ``(A) which is--
                            ``(i) tangible property (to which section 
                        168 applies), or
                            ``(ii) computer software (as defined in 
                        section 197(e)(3)(B)) which is described in 
                        section 197(e)(3)(A)(i) and to which section 
                        167 applies,
                    ``(B) which is section 1245 property (as defined in 
                section 1245(a)(3)), and
                    ``(C) which is acquired by purchase for use in the 
                active conduct of a trade or business.
        Such term shall not include any property described in section 
        50(b) and shall not include air conditioning or heating 
        units.''.
    (d) Inflation Adjustment of Dollar Limitation and Phaseout 
Threshold.--Subsection (b) of section 179 of such Code is amended by 
adding at the end the following new paragraph:
            ``(5) Inflation adjustments.--
                    ``(A) In general.--In the case of any taxable year 
                beginning in a calendar year after 2003, the dollar 
                amounts in paragraphs (1) and (2) shall each be 
                increased by an amount equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for the 
                        calendar year in which the taxable year begins, 
                        by substituting `calendar year 2002' for 
                        `calendar year 1992' in subparagraph (B) 
                        thereof.
                    ``(B) Rounding.--
                            ``(i) Dollar limitation.--If the amount in 
                        paragraph (1) as increased under subparagraph 
                        (A) is not a multiple of $1,000, such amount 
                        shall be rounded to the nearest multiple of 
                        $1,000.
                            ``(ii) Phaseout amount.--If the amount in 
                        paragraph (2) as increased under subparagraph 
                        (A) is not a multiple of $10,000, such amount 
                        shall be rounded to the nearest multiple of 
                        $10,000.''.
    (e) Revocation of Election.--Paragraph (2) of section 179(c) of 
such Code (relating to election irrevocable) is amended to read as 
follows:
            ``(2) Revocation of election.--The taxpayer may revoke an 
        election under paragraph (1), and any specification contained 
        in any such election, with respect to any property. Such 
        revocation, once made, shall be irrevocable.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2002.

SEC. 3. NEUTRAL COST RECOVERY DEPRECIATION ADJUSTMENT FOR CERTAIN 
              PROPERTY PLACED IN SERVICE AFTER DECEMBER 31, 2003.

    (a) In General.--Section 168 of the Internal Revenue Code of 1986 
(relating to accelerated cost recovery system) is amended by adding at 
the end thereof the following new subsection:
    ``(k) Deduction Adjustment To Allow Equivalent of Expensing for 
Certain Property Placed in Service After December 31, 2003.--
            ``(1) In general.--In the case of property placed in 
        service after December 31, 2003, that the taxpayer would (but 
        for the second sentence of section 179(b)(1)) be eligible to 
        fully expense under section 179, the deduction under this 
        section with respect to such property--
                    ``(A) shall be determined by substituting `150 
                percent' for `200 percent' in subsection (b)(1) in the 
                case of property to which the 200 percent declining 
                balance method would otherwise apply, and
                    ``(B) for any taxable year after the taxable year 
                during which the property is placed in service shall 
                be--
                            ``(i) the amount determined under this 
                        section for such taxable year without regard to 
                        this subparagraph, multiplied by
                            ``(ii) the applicable neutral cost recovery 
                        ratio for such taxable year.
            ``(2) Applicable neutral cost recovery ratio.--For purposes 
        of paragraph (1)--
                    ``(A) In general.--The applicable neutral cost 
                recovery ratio for the property for any taxable year is 
                the number determined by--
                            ``(i) dividing--
                                    ``(I) the gross domestic product 
                                deflator for the calendar quarter 
                                ending in such taxable year which 
                                corresponds to the calendar quarter 
                                during which the property was placed in 
                                service by the taxpayer, by
                                    ``(II) the gross domestic product 
                                deflator for the calendar quarter 
                                during which the property was placed in 
                                service by the taxpayer, and
                            ``(ii) then multiplying the number 
                        determined under clause (i) by the number equal 
                        to 1.035 to the nth power where `n' is the 
                        number of full years in the period beginning on 
                        the 1st day of the calendar quarter during 
                        which the property was placed in service by the 
                        taxpayer and ending on the day before the 
                        beginning of the corresponding calendar quarter 
                        ending during such taxable year.
                The applicable neutral cost recovery ratio shall never 
                be less than 1. The applicable neutral cost recovery 
                ratio shall be rounded to the nearest \1/1000\.
                    ``(B) Special rule for certain property.--In the 
                case of property described in paragraph (2) or (3) of 
                subsection (b) or in subsection (g), the applicable 
                neutral cost recovery ratio shall be determined without 
                regard to subparagraph (A)(ii).
            ``(3) Gross domestic product deflator.--For purposes of 
        paragraph (2), the gross domestic product deflator for any 
        calendar quarter is the implicit price deflator for the gross 
        domestic product for such quarter (as shown in the first 
        revision thereof).
            ``(4) Election not to have subsection apply.--This 
        subsection shall not apply to any property if the taxpayer 
        elects not to have this subsection apply to such property. Such 
        an election, once made, shall be irrevocable.
            ``(5) Churning transactions.--This subsection shall not 
        apply to any property if this section would not apply to such 
        property were subsection (f)(5)(A)(ii) applied by substituting 
        `2004' for `1981' and `2003' for `1980'.
            ``(6) Additional deduction not to affect basis or 
        recapture.--
                    ``(A) In general.--The additional amount determined 
                under this section by reason of this subsection shall 
                not be taken into account in determining the adjusted 
                basis of any property or of any interest in a pass-thru 
                entity which holds such property and shall not be 
                treated as a deduction for depreciation for purposes of 
                sections 1245 and 1250.
                    ``(B) Pass-thru entity defined.--For purposes of 
                subparagraph (A), the term `pass-thru entity' means--
                            ``(i) a regulated investment company,
                            ``(ii) a real estate investment trust,
                            ``(iii) an S corporation,
                            ``(iv) a partnership,
                            ``(v) an estate or trust, and
                            ``(vi) a common trust fund.''
    (b) Minimum Tax Treatment.--
            (1) Paragraph (1) of section 56(a) of such Code is amended 
        by adding at the end thereof the following new subparagraph:
                    ``(E) Use of neutral cost recovery ratio.--In the 
                case of property to which section 168(k) applies and 
                which is placed in service after December 31, 2003, the 
                deduction allowable under this paragraph with respect 
                to such property for any taxable year (after the 
                taxable year during which the property is placed in 
                service) shall be--
                            ``(i) the amount so allowable for such 
                        taxable year without regard to this 
                        subparagraph, multiplied by
                            ``(ii) the applicable neutral cost recovery 
                        ratio for such taxable year (as determined 
                        under section 168(k)).
                This subparagraph shall not apply to any property with 
                respect to which there is an election in effect not to 
                have section 168(k)) apply.''
            (2) Subparagraph (C) of section 56(g)(4) of such Code is 
        amended by adding at the end the following new clause:
                            ``(v) Neutral cost recovery deduction.--
                        Clause (i) shall not apply to the additional 
                        deduction allowable by reason of section 
                        168(k).''
    (c) Coordination With Depreciation Limitation on Certain 
Automobiles.--Clause (i) of section 280F(a)(1)(B) of such Code is 
amended by adding at the end the following new sentence: ``For purposes 
of this clause, the unrecovered basis of any passenger automobile shall 
be treated as including the additional amount determined under section 
168 by reason of subsection (k) thereof to the extent not allowed as a 
deduction by reason of this paragraph for any taxable year in the 
recovery period.''
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years ending after December 31, 2003.