To amend the Internal Revenue Code of 1986 to allow a credit against income tax to C corporations which have substantial employee ownership and to encourage stock ownership by employees by excluding from gross income stock paid as compensation for services, and for other purposes.

Summary: Employee Participation Incentive Act of 2005 - Amends the Internal Revenue Code to: (1) cap at 30 percent the maximum income tax rate for corporations that have a 20 percent or greater employee ownership rate; (2) exclude from employee gross income up to 20 percent of wages paid in stock; and (3) allow such corporations a tax deduction for certain stock options granted to employees.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Employee Participation Incentive Act 
of 2005''.

SEC. 2. MAXIMUM RATE OF INCOME TAX FOR C CORPORATIONS WITH SUBSTANTIAL 
              EMPLOYEE OWNERSHIP.

    (a) In General.--Section 11 of the Internal Revenue Code of 1986 
(relating to tax on corporations) is amended by redesignating 
subsections (c) and (d) as subsections (d) and (e), respectively, and 
by inserting after subsection (b) the following new subsection:
    ``(c) Maximum Rate of 30 Percent for Corporations With Substantial 
Employee Ownership.--
            ``(1) In general.--Except as provided in subsection (b)(2), 
        the maximum rate of tax under subsection (b) shall be 30 
        percent with respect to any corporation if, with respect to 
        such corporation--
                    ``(A) the employee voting percentage is at least 20 
                percent, and
                    ``(B) the employee value percentage is at least 20 
                percent.
            ``(2) Definitions.--For purposes of this subsection--
                    ``(A) Employee voting percentage.--The term 
                `employee voting percentage' means the percentage of 
                the total voting power of the stock of such corporation 
                which is held directly by employees of such 
                corporation.
                    ``(B) Employee value percentage.--The term 
                `employee value percentage' means the percentage of the 
                total value of the stock of such corporation which is 
                held directly by employees of such corporation.
                    ``(C) Stock.--The term `stock' has the meaning 
                given such term under section 1504.
            ``(3) Determination of ownership averages.--
                    ``(A) In general.--The determination of the 
                employee voting percentage and the employee value 
                percentage shall be made on the last day of the taxable 
                year of the corporation.
                    ``(B) Holdings of 5 percent-shareholders and highly 
                compensated employees disregarded.--Each such 
                percentage shall be determined without regard to the 
                holdings of any highly compensated employee (as defined 
                in section 414(q)). Notwithstanding the preceding 
                sentence, the holdings of 5-percent owners (as defined 
                in such section) shall be taken into account if the 
                corporation has 50 or fewer employees.
                    ``(C) Controlled groups.--In the case of 
                corporations which are treated as a single employer 
                under section 52(a)--
                            ``(i) such corporations shall be treated as 
                        1 corporation for purposes of subparagraph (B), 
                        and
                            ``(ii) the Secretary shall prescribe 
                        regulations--
                                    ``(I) for the application of this 
                                subsection in the case of corporations 
                                filing a consolidated return, and
                                    ``(II) to prevent the abuse of the 
                                purposes of this subsection.''.
    (b) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.

SEC. 3. EXCLUSION FROM GROSS INCOME FOR COMPENSATION PAID IN STOCK BY 
              CERTAIN CORPORATIONS.

    (a) In General.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to items specifically excluded 
from gross income) is amended by inserting after section 139A the 
following new section:

``SEC. 139B. COMPENSATION PAID IN STOCK BY CERTAIN CORPORATIONS.

    ``(a) In General.--In the case of an employee of an eligible 
corporation, gross income of such employee does not include 
remuneration received in the form of stock of such corporation or of 
any parent or subsidiary (within the meaning of section 422(b)) of such 
corporation.
    ``(b) Limitation.--The amount excluded under subsection (a) from 
the gross income of an employee for any taxable year shall not exceed 
20 percent of the wages (as defined in section 3401(a) without regard 
to paragraph (23)) which would (but for this section) be includible in 
gross income for such year.
    ``(c) Eligible Corporation.--For purposes of this section, the term 
`eligible corporation' means, with respect to any taxable year of an 
employee, any corporation if--
            ``(1) the corporation offers to pay remuneration for 
        services performed during the calendar year in which or with 
        which such taxable year ends in the form of stock of such 
        corporation to at least 95 percent of such corporation's full-
        time employees, and
            ``(2) at least 95 percent of the value of the stock which 
        is so offered during such calendar year is offered to employees 
        whose wages (as defined in section 3401(a)) are among the 
        bottom 75 percent of the employees when ranked on the basis of 
        such wages.
    ``(d) Basis.--The amount excluded from gross income under this 
section shall not be taken into account in determining the basis of the 
stock.''.
    (b) Exclusion From Withholding.--Subsection (a) of section 3401 of 
such Code is amended by striking ``or'' at the end of paragraph (21), 
by striking the period at the end of paragraph (22) and inserting ``; 
or'', and by adding at the end the following new paragraph:
            ``(23) in the form of stock if at the time such stock is 
        paid it is reasonable to believe that the employee will be able 
        to exclude such stock from income under section 139B.''.
    (c) Clerical Amendment.--The table of sections for such part III is 
amended by inserting after the item relating to section 139A the 
following new item:

``139B. Compensation paid in stock by certain corporations.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.

SEC. 4. DEDUCTION ALLOWED TO ELIGIBLE CORPORATIONS AT TIME QUALIFIED 
              STOCK OPTION GRANTED.

    (a) In General.--Subsection (a) of section 421 of the Internal 
Revenue Code of 1986 (relating to general rules for certain stock 
options) is amended by adding at the end the following flush sentence:
 ``Paragraph (2) shall not apply to options granted during any calendar 
year for which the corporation is an eligible corporation (as defined 
in section 139B(c)).''.
    (b) Effective Date.--The amendment made by subsection (a) shall 
apply to options granted after the date of the enactment of this Act.