To amend the Internal Revenue Code of 1986 to provide incentives for the conservation of water.

Summary: Water Conservation Incentive Act of 2004 - Amends the Internal Revenue Code to allow a refundable tax credit for the cost of qualified water conservation property installed in a principal residence and which has a useful life of at least five years. Defines "qualified water conservation property" to include smart dual or multi program irrigation clocks, low-flow shower heads, ultra low-flush toilets, and high-efficiency clothes washing machines. Limits the amount of such credit to $1,000 for a taxable year.

Allows certain small business employers (100 or fewer employees) a business tax credit for ten percent of the cost of qualified water conservation property installed in or in connection with such employer's principal place of business.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Water Conservation Incentive Act of 
2004''.

SEC. 2. FINDINGS.

    The Congress finds that--
            (1) a severe to extreme drought affected approximately 15 
        percent of the contiguous United States as of the end of April 
        2004,
            (2) about 32 percent of the contiguous United States fell 
        in the moderate to extreme drought categories at the end of 
        April 2004,
            (3) the Colorado River system is facing the worst drought 
        on record,
            (4) the drought throughout the western United States could 
        persist for up to another 30 years,
            (5) growing populations and changing values have increased 
        demands on water supplies and river systems, resulting in water 
        use and management conflicts throughout the country, 
        particularly in the West, where the population is expected to 
        increase at least 30 percent in the next 20-25 years, and
            (6) unless highly efficient water usage practices can be 
        developed and maintained in the West, it will not be possible 
        to provide the water needed to sustain western ecosystems, as 
        well as population growth.

SEC. 3. REFUNDABLE CREDIT FOR RESIDENTIAL WATER CONSERVATION.

    (a) In General.--Subpart C of part IV of subchapter A of chapter 1 
of the Internal Revenue Code of 1986 (relating to refundable credits) 
is amended by redesignating section 36 as section 37 and by inserting 
after section 35 the following new section:

``SEC. 36. RESIDENTIAL WATER CONSERVATION.

    ``(a) Allowance of Credit.--In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this chapter 
for the taxable year an amount equal to the qualified water 
conservation expenditures made by the taxpayer during the taxable year.
    ``(b) Limitations.--
            ``(1) Maximum credit.--The credit allowed under subsection 
        (a) for a taxable year shall not exceed $1,000.
            ``(2) Minimum expenditures.--If the aggregate qualified 
        water conservation expenditures made by the taxpayer during a 
        taxable year is less than $50, the amount allowed as a credit 
        under subsection (a) for the taxable year shall be zero.
            ``(3) Property standards.--No credit shall be allowed under 
        this section for an item of property unless--
                    ``(A) the original use of such property commences 
                with the taxpayer,
                    ``(B) such property reasonably can be expected to 
                remain in use for at least 5 years, and
                    ``(C) such property is installed on or in 
                connection with a dwelling unit located in the United 
                States and used as the principal residence (within the 
                meaning of section 121) of the taxpayer.
    ``(c) Qualified Water Conservation Expenditures.--For purposes of 
this section--
            ``(1) In general.--The term `qualified water conservation 
        expenditure' means the amount paid for qualified water 
        conservation property.
            ``(2) Qualified water conservation property.--The term 
        `qualified water conservation property' means--
                    ``(A) smart dual or multi program irrigation clock 
                that allows the watering of plant and grass areas 
                separately and which is capable of adjusting the 
                watering schedule based on the watering needs of the 
                landscape being watered,
                    ``(B) water efficient landscaping, including--
                            ``(i) xeriscape (which is low-water use 
                        native and non-native plants and grasses), and
                            ``(ii) artificial turf,
                    ``(C) low-flow shower heads that use no more than 3 
                gallons of water per minute,
                    ``(D) ultra low-flush toilets that use no more than 
                1.6 gallons of water per flush,
                    ``(E) dual flush toilets that allow the consumer to 
                select either a short flush of 0.80 gallons of water or 
                a long flush of 1.6 gallons of water,
                    ``(F) drip irrigation,
                    ``(G) high-efficiency clothes washing machine, and
                    ``(H) any other property of a type specified by the 
                Secretary.
            ``(3) Limitation on types of property specified by 
        secretary.--The Secretary may only specify a type of property 
        for purposes of paragraph (2)(H) if--
                    ``(A) the principal use of such property is to 
                reduce the amount of water consumed in any existing 
                residential process,
                    ``(B) such property or the use of such property is 
                not harmful to persons or the environment and does not 
                induce the use of any other item which may be hazardous 
                to persons or the environment, and
                    ``(C) the Secretary determines that the credit 
                allowed under subsection (a) with respect to such 
                property, together with any other Federal subsidy of 
                such property, is not superfluous and inefficient.
    ``(d) Special Rules.--For purposes of this section--
            ``(1) Dollar amounts in case of joint occupancy.--In the 
        case of any dwelling unit which is jointly occupied and used 
        during any calendar year as a residence by 2 or more 
        individuals, the following rules shall apply:
                    ``(A) The amount of the credit allowable under 
                subsection (a) by reason of expenditures made during 
                such calendar year by any of such individuals with 
                respect to such dwelling unit shall be determined by 
                treating all of such individuals as 1 taxpayer whose 
                taxable year is such calendar year.
                    ``(B) There shall be allowable, with respect to 
                such expenditures to each of such individuals, a credit 
                under subsection (a) for the taxable year in which such 
                calendar year ends in an amount which bears the same 
                ratio to the amount determined under subparagraph (A) 
                as the amount of such expenditures made by such 
                individual during such calendar year bears to the 
                aggregate of such expenditures made by all of such 
                individuals during such calendar year.
            ``(2) Tenant-stockholder in cooperative housing 
        corporation.--In the case of an individual who is a tenant-
        stockholder (as defined in section 216) in a cooperative 
        housing corporation (as defined in such section), such 
        individual shall be treated as having made the individual's 
        tenant-stockholder's proportionate share (as defined in section 
        216(b)(3)) of any expenditures of such corporation.
            ``(3) Condominiums.--
                    ``(A) In general.--In the case of an individual who 
                is a member of a condominium management association 
                with respect to a condominium which the individual 
                owns, such individual shall be treated as having made 
                the individual's proportionate share of any 
                expenditures of such association.
                    ``(B) Condominium management association.--For 
                purposes of this paragraph, the term `condominium 
                management association' means an organization which 
                meets the requirements of paragraph (1) of section 
                528(c) (other than subparagraph (E) thereof) with 
                respect to a condominium project substantially all of 
                the units of which are used as residences.
            ``(4) Allocation in certain cases.--If less than 80 percent 
        of the use of an item is for nonbusiness purposes, only that 
        portion of the expenditures for such item which is properly 
        allocable to use for nonbusiness purposes shall be taken into 
        account.
            ``(5) When expenditure made; amount of expenditure.--
                    ``(A) In general.--Except as provided in 
                subparagraph (B), an expenditure with respect to an 
                item shall be treated as made when the original 
                installation of the item is completed.
                    ``(B) Expenditures part of building construction.--
                In the case of an expenditure in connection with the 
                construction or reconstruction of a structure, such 
                expenditure shall be treated as made when the original 
                use of the constructed or reconstructed structure by 
                the taxpayer begins.
                    ``(C) Amount.--The amount of any expenditure shall 
                be the cost thereof.
            ``(6) Property financed by subsidized energy financing.--
        For purposes of determining the amount of expenditures made by 
        any individual with respect to any dwelling unit, there shall 
        not be taken into account expenditures which are made from 
        subsidized energy financing (as defined in section 
        48(a)(4)(C)).
    ``(e) Basis Adjustments.--For purposes of this subtitle, if a 
credit is allowed under this section for any expenditure with respect 
to any property, the increase in the basis of such property which would 
(but for this subsection) result from such expenditure shall be reduced 
by the amount of the credit so allowed.''.
    (b) Conforming Amendments.--
            (1) Section 1016(a) of such Code 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) to the extent provided in section 36(e), in the case 
        of amounts with respect to which a credit has been allowed 
        under section 36.''.
            (2) The table of sections for subpart A of part IV of 
        subchapter A of chapter 1 of such Code is amended by striking 
        the item relating to section 36 and inserting after the item 
        relating to section 35 the following new items:

``Sec. 36. Residential water conservation.
``Sec. 37. Overpayments of tax.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to property placed in service after December 31, 2003.

SEC. 4. CREDIT FOR WATER CONSERVATION.

    (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. COMMERCIAL WATER CONSERVATION CREDIT.

    ``(a) In General.--For purposes of section 38, in the case of a 
small employer, the credit determined under this section for the 
taxable year is an amount equal to 10 percent of the aggregate adjusted 
bases of all qualified water conservation property installed in or in 
connection with the principal place of business (within the meaning of 
section 280A(c)(1)) of the taxpayer located in the United States.
    ``(b) Definitions.--For purposes of this section--
            ``(1) Small employer.--
                    ``(A) In general.--The term `small employer' means, 
                with respect to any taxable year, any employer if such 
                employer employed an average of 100 or fewer employees 
                on business days during either of the 2 preceding 
                calendar years. For purposes of the preceding sentence, 
                a preceding calendar year may be taken into account 
                only if the employer was in existence throughout such 
                year.
                    ``(B) Employers not in existence in preceding 
                year.--In the case of an employer which was not in 
                existence throughout the 1st preceding taxable year, 
                the determination under subparagraph (A) shall be based 
                on the average number of employees that it is 
                reasonably expected such employer will employ on 
                business days in the current taxable year.
                    ``(C) Special rules.--
                            ``(i) Controlled groups.--For purposes of 
                        this paragraph, all persons treated as a single 
                        employer under subsection (b), (c), (m), or (o) 
                        of section 414 shall be treated as 1 employer.
                            ``(ii) Predecessors.--Any reference in this 
                        paragraph to an employer shall include a 
                        reference to any predecessor of such employer.
            ``(2) Qualified water conservation property.--The term 
        `qualified water conservation property' has the meaning given 
        to such term by section 36(c)(2).
    ``(c) Special Rules.--For purposes of this section--
            ``(1) In general.--Rules similar to the rules of section 
        36(d) (other than paragraph (4) thereof) shall apply for 
        purposes of this section.
            ``(2) Coordination with certain credits.--
                    ``(A) The basis of any property referred to in 
                subsection (a) shall be reduced by that portion of the 
                basis of any property which is attributable to 
                qualified rehabilitation expenditures (as defined in 
                section 47(c)(2)) or to the energy percentage of energy 
                property (as determined under section 48(a)).
                    ``(B) Expenditures taken into account under section 
                47 or 48(a) shall not be taken into account under this 
                section.
            ``(3) Denial of double benefit.--No deduction or credit 
        shall be allowed under this chapter for any amount taken into 
        account in determining the credit under this section.
            ``(4) 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.
    ``(d) Basis Adjustment.--For purposes of this subtitle, if a credit 
is determined under this section for any expenditure with respect to 
any property, the increase in the basis of such property which would 
(but for this subsection) result from such expenditure shall be reduced 
by the amount of the credit so determined.''.
    (b) Credit Made Part of General Business Credit.--Section 38(b) of 
such Code (relating to current year 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) the commercial water conservation credit determined 
        under section 45G(a).''.
    (c) Basis Adjustment.--Subsection (a) of section 1016 of such Code 
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) to the extent provided in section 45G(d), in the 
        case of amounts with respect to which a credit has been allowed 
        under section 45G.''.
    (d) Limitation on Carryback.--Subsection (d) of section 39 of such 
Code is amended to read as follows:
    ``(d) No Carryback of Commercial Water Conservation Credit Before 
January 1, 2004.--No portion of the unused business credit for any 
taxable year which is attributable to the commercial water conservation 
credit determined under section 45G may be carried back to a taxable 
year beginning before January 1, 2004.''.
    (e) Clerical Amendment.--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:

``45G. Commercial water conservation credit.''.
    (f) Effective Date.--The amendments made by this section shall 
apply to property placed in service after December 31, 2003.