To amend the Internal Revenue Code of 1986 to assist small business refiners in complying with Environmental Protection Agency sulfur regulations.

Summary: Amends the Internal Revenue Code to permit a small business refiner: (1) to expense a portion of the costs of complying with the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency; and (2) a limited tax credit for every gallon of 15 parts per million or less sulfur diesel produced at a facility by such small business refiner.

SECTION 1. EXPENSING OF CAPITAL COSTS INCURRED IN COMPLYING WITH 
              ENVIRONMENTAL PROTECTION AGENCY SULFUR REGULATIONS.

    (a) In General.--Section 179(b) of the Internal Revenue Code of 
1986 (relating to election to expense certain depreciable business 
assets) is amended by adding at the end the following new paragraph:
            ``(5) Limitation for small business refiners.--
                    ``(A) In general.--In the case of a small business 
                refiner electing to expense qualified costs, in lieu of 
                the dollar limitations in paragraph (1), the limitation 
                on the aggregate costs which may be taken into account 
                under subsection (a) for any taxable year shall not 
                exceed 75 percent of the qualified costs.
                    ``(B) Qualified costs.--For purposes of this 
                paragraph, the term `qualified costs' means costs paid 
                or incurred by a small business refiner for the purpose 
                of complying with the Highway Diesel Fuel Sulfur 
                Control Requirements of the Environmental Protection 
                Agency.
                    ``(C) Small business refiner.--For purposes of this 
                paragraph, the term `small business refiner' means, 
                with respect to any taxable year, a refiner which, 
                within the refining operations of the business, employs 
                not more than 1,500 employees on business days during 
                such taxable year and has less than 155,000 barrels per 
                day total capacity.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after the date of the enactment of this Act.

SEC. 2. ENVIRONMENTAL TAX CREDIT.

    (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. 45G. ENVIRONMENTAL TAX CREDIT.

    ``(a) In General.--For purposes of section 38, the amount of the 
environmental tax credit determined under this section with respect to 
any small business refiner for any taxable year is an amount equal to 5 
cents for every gallon of 15 parts per million or less sulfur diesel 
produced at a facility by such small business refiner.
    ``(b) Maximum Credit.--For any small business refiner, the 
aggregate amount allowable as a credit under subsection (a) for any 
taxable year with respect to any facility shall not exceed 25 percent 
of the qualified capital costs incurred by such small business refiner 
with respect to such facility not taken into account in determining the 
credit under subsection (a) for any preceding taxable year.
    ``(c) Definitions.--For purposes of this section--
            ``(1) Small business refiner.--The term `small business 
        refiner' means, with respect to any taxable year, a refiner 
        which, within the refining operations of the business, employs 
        not more than 1,500 employees on business days during such 
        taxable year and has less than 155,000 barrels per day total 
        capacity.
            ``(2) Qualified capital costs.--The term `qualified capital 
        costs' means, with respect to any facility, those costs paid or 
        incurred during the applicable period for compliance with the 
        applicable EPA regulations with respect to such facility, 
        including expenditures for the construction of new process 
        operation units or the dismantling and reconstruction of 
        existing process units to be used in the production of 15 parts 
        per million or less sulfur diesel fuel, associated adjacent or 
        offsite equipment (including tankage, catalyst, and power 
        supply), engineering, construction period interest, and 
        sitework.
            ``(3) Applicable epa regulations.--The term `applicable EPA 
        regulations' means the Highway Diesel Fuel Sulfur Control 
        Requirements of the Environmental Protection Agency.
            ``(4) Applicable period.--The term `applicable period' 
        means, with respect to any facility, the period beginning with 
        the date of the enactment of this section and ending with the 
        date which is one year after the date on which the taxpayer 
        must comply with the applicable EPA regulations with respect to 
        such facility.
    ``(d) Reduction in Basis.--For purposes of this subtitle, if a 
credit is determined under this section with respect to any property by 
reason of qualified capital costs, the basis of such property shall be 
reduced by the amount of the credit so determined.
    ``(e) Certification.--
            ``(1) Required.--Not later than the date which is 30 months 
        after the first day of the first taxable year in which the 
        environmental tax credit is allowed with respect to a facility, 
        the small business refiner must obtain certification from the 
        Secretary, in consultation with the Administrator of the 
        Environmental Protection Agency, that the taxpayer's qualified 
        capital costs with respect to such facility will result in 
        compliance with the applicable EPA regulations.
            ``(2) Contents of application.--An application for 
        certification shall include relevant information regarding unit 
        capacities and operating characteristics sufficient for the 
        Secretary, in consultation with the Administrator of the 
        Environmental Protection Agency, to determine that such 
        qualified capital costs are necessary for compliance with the 
        applicable EPA regulations.
            ``(3) Review period.--Any application shall be reviewed and 
        notice of certification, if applicable, shall be made within 60 
        days of receipt of such application.
            ``(4) Recapture.--Notwithstanding subsection (f), failure 
        to obtain certification under paragraph (1) constitutes a 
        recapture event under subsection (f) with an applicable 
        percentage of 100 percent.
    ``(f) Recapture of Environmental Tax Credit.--
            ``(1) In general.--Except as provided in subsection (e), 
        if, as of the close of any taxable year, there is a recapture 
        event with respect to any facility of the small business 
        refiner, then the tax of such refiner under this chapter for 
        such taxable year shall be increased by an amount equal to the 
        product of--
                    ``(A) the applicable recapture percentage, and
                    ``(B) the aggregate decrease in the credits allowed 
                under section 38 for all prior taxable years which 
                would have resulted if the qualified capital costs of 
                the taxpayer described in subsection (c)(2) with 
                respect to such facility had been zero.
            ``(2) Applicable recapture percentage.--
                    ``(A) In general.--For purposes of this subsection, 
                the applicable recapture percentage shall be determined 
                from the following table:

  
                                                         The applicable
  
                                                              recapture
            ``If the recapture event occurs in:
                                                         percentage is:
                Year 1...............................          100     
                Year 2...............................           80     
                Year 3...............................           60     
                Year 4...............................           40     
                Year 5...............................           20     
                Years 6 and thereafter...............            0.    
                    ``(B) Years.--For purposes of subparagraph (A), 
                year 1 shall begin on the first day of the taxable year 
                in which the qualified capital costs with respect to a 
                facility described in subsection (c)(2) are paid or 
                incurred by the taxpayer.
            ``(3) Recapture event defined.--For purposes of this 
        subsection, the term `recapture event' means--
                    ``(A) Failure to comply.--The failure by the small 
                business refiner to meet the applicable EPA regulations 
                within the applicable period with respect to the 
                facility.
                    ``(B) Cessation of operation.--The cessation of the 
                operation of the facility as a facility which produces 
                15 parts per million or less sulfur diesel after the 
                applicable period.
                    ``(C) Change in ownership.--
                            ``(i) In general.--Except as provided in 
                        clause (ii), the disposition of a small 
                        business refiner's interest in the facility 
                        with respect to which the credit described in 
                        subsection (a) was allowable.
                            ``(ii) Agreement to assume recapture 
                        liability.--Clause (i) shall not apply if the 
                        person acquiring such interest in the facility 
                        agrees in writing to assume the recapture 
                        liability of the person disposing of such 
                        interest in effect immediately before such 
                        disposition. In the event of such an 
                        assumption, the person acquiring the interest 
                        in the facility shall be treated as the 
                        taxpayer for purposes of assessing any 
                        recapture liability (computed as if there had 
                        been no change in ownership).
            ``(4) Special rules.--
                    ``(A) Tax benefit rule.--The tax for the taxable 
                year shall be increased under paragraph (1) only with 
                respect to credits allowed by reason of this section 
                which were used to reduce tax liability. In the case of 
                credits not so used to reduce tax liability, the 
                carryforwards and carrybacks under section 39 shall be 
                appropriately adjusted.
                    ``(B) No credits against tax.--Any increase in tax 
                under this subsection shall not be treated as a tax 
                imposed by this chapter for purposes of determining the 
                amount of any credit under subpart A, B, or D of this 
                part.
                    ``(C) No recapture by reason of casualty loss.--The 
                increase in tax under this subsection shall not apply 
                to a cessation of operation of the facility by reason 
                of a casualty loss to the extent such loss is restored 
                by reconstruction or replacement within a reasonable 
                period established by the Secretary.
    ``(g) Controlled Groups.--For purposes of this section, all persons 
treated as a single employer under subsection (b), (c), (m), or (o) of 
section 414 shall be treated as a single employer.''.
    (b) Credit Made Part of General Business Credit.--Subsection (b) of 
section 38 of the Internal Revenue Code of 1986 (relating to general 
business credit) is amended by striking ``plus'' at the end of 
paragraph (14), by striking the period at the end of paragraph (15) and 
inserting ``, plus'', and by adding at the end the following new 
paragraph:
            ``(16) in the case of a small business refiner, the 
        environmental tax credit determined under section 45G(a).''.
    (c) Denial of Double Benefit.--Section 280C of the Internal Revenue 
Code of 1986 (relating to certain expenses for which credits are 
allowable) is amended by adding at the end the following new 
subsection:
    ``(d) Environmental Tax Credit.--No deduction shall be allowed for 
that portion of the expenses otherwise allowable as a deduction for the 
taxable year which is equal to the amount of the credit determined for 
the taxable year under section 45G(a).''.
    (d) Credit Allowed Against Regular and Minimum Tax.--
            (1) In general.--Subsection (c) of section 38 of the 
        Internal Revenue Code of 1986 (relating to limitation based on 
        amount of tax) is amended by redesignating paragraph (3) as 
        paragraph (4) and by inserting after paragraph (2) the 
        following new paragraph:
            ``(3) Special rules for environmental tax credit.--
                    ``(A) In general.--In the case of the environmental 
                tax credit--
                            ``(i) this section and section 39 shall be 
                        applied separately with respect to the credit, 
                        and
                            ``(ii) in applying paragraph (1) to the 
                        credit--
                                    ``(I) subparagraphs (A) and (B) 
                                thereof shall not apply, and
                                    ``(II) the limitation under 
                                paragraph (1) (as modified by subclause 
                                (I)) shall be reduced by the credit 
                                allowed under subsection (a) for the 
                                taxable year (other than the 
                                environmental tax credit).
                    ``(B) Environmental tax credit.--For purposes of 
                this subsection, the term `environmental tax credit 
                means the credit allowable under subsection (a) by 
                reason of section 45G.''.
            (2) Conforming amendment.--Subclause (II) of section 
        38(c)(2)(A)(ii) of such Code is amended by inserting ``or the 
        environmental tax credit'' after ``employment credit''.
    (e) Basis Adjustment.--Section 1016(a) of the Internal Revenue Code 
of 1986 (relating to adjustments to basis) is amended by striking 
``and'' at the end of paragraph (27), by striking the period at the end 
of paragraph (28) and inserting ``, and'', and by adding at the end the 
following new paragraph:
            ``(29) in the case of a facility with respect to which a 
        credit was allowed under section 45G, to the extent provided in 
        section 45G(d).''.
    (f) Clerical Amendment.--The table of sections for subpart D of 
part IV of subchapter A of chapter 1 of the Internal Revenue Code of 
1986 is amended by adding at the end the following new item:

                              ``Sec. 45G. Environmental tax credit.''.
    (g) Effective Date.--The amendments made by this section shall 
apply to expenses paid or incurred after the date of the enactment of 
this Act.