II 

109TH CONGRESS 

2D SESSION S. 3857 

To amend the Internal Revenue Code of 1986 to provide incentives to small 

businesses. 

IN THE SENATE OF THE UNITED STATES 

SEPTEMBER 6, 2006 

Mr. SMITH (for himself and Mrs. LINCOLN) introduced the following bill; 

which was read twice and referred to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 to provide 

incentives to small businesses. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Bringing Opportunities 

5 to Our Small Business Taxpayers Act’’ or ‘‘BOOST Act’’. 


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1 TITLE I—TAX FAIRNESS FOR 

2 SMALL BUSINESSES 

3 SEC. 101. PERMANENT EXTENSION OF EXPENSING FOR 

4 SMALL BUSINESSES. 

5 (a) DOLLAR LIMITATION.—Paragraph (1) of section 

6 179(b) of the Internal Revenue Code of 1986, as amended 

7 by the Tax Increase Prevention and Reconciliation Act of 

8 2005, is amended by striking ‘‘$25,000 ($100,000 in the 

9 case of taxable years beginning after 2002 and before 

10 2010)’’ and inserting ‘‘$100,000’’. 

11 (b) REDUCTION IN LIMITATION.—Paragraph (2) of 

12 section 179(b) of such Code, as amended by the Tax In13 crease Prevention and Reconciliation Act of 2005, is 

14 amended by striking ‘‘$200,000 ($400,000 in the case of 

15 taxable years beginning after 2002 and before 2010)’’ and 

16 inserting ‘‘$400,000’’. 

17 (c) INFLATION ADJUSTMENTS.—Subparagraph (A) 

18 of section 179(b)(5) of such Code, as amended by the Tax 

19 Increase Prevention and Reconciliation Act of 2005, is 

20 amended by striking ‘‘and before 2010’’. 

21 (d) ELECTION.—Paragraph (2) of section 179(c) of 

22 such Code, as amended by the Tax Increase Prevention 

23 and Reconciliation Act of 2005, is amended by striking 

24 ‘‘and before 2010’’. 


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1 (e) COMPUTER SOFTWARE.—Clause (ii) of section 

2 179(d)(1)(A), as amended by the Tax Increase Prevention 

3 and Reconciliation Act of 2005, is amended by striking 

4 ‘‘and before 2010’’. 

5 SEC. 102. MODIFICATION OF CONSTRUCTION CONTRACTS 

6 EXCEPTION TO PERCENTAGE OF COMPLE7 TION METHOD OF ACCOUNTING. 

8 (a) IN GENERAL.—Clause (ii) section 460(e)(1)(B) 

9 of the Internal Revenue Code of 1986 is amended by strik10 ing ‘‘$10,000,000’’ and inserting ‘‘$25,000,000’’. 

11 (b) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to contracts entered into after the 

13 date of the enactment of this Act. 

14 SEC. 103. MODIFICATION OF LOOK-BACK METHOD FOR 

15 CERTAIN CONSTRUCTION CONTRACTS. 

16 (a) IN GENERAL.—Subparagraph (B) of section 

17 460(b)(3) of the Internal Revenue Code of 1986 is amend18 ed to read as follows: 

19 ‘‘(B) LOOK-BACK METHOD NOT TO APPLY

20 TO CERTAIN CONTRACTS.—Paragraph (1)(B) 

21 shall not apply to— 

22 ‘‘(i) any construction contract which 

23 is— 

24 ‘‘(I) entered into by a taxpayer 

25 whose average annual gross receipts 


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1 for the 3 taxable years preceding the 

2 taxable year in which such contract is 

3 completed do not exceed $25,000,000, 

4 and 

5 ‘‘(II) completed within 3 years of 

6 the contract commencement date, or 

7 ‘‘(ii) any other contract— 

8 ‘‘(I) the gross price of which (as 

9 of the completion of the contract) 

10 does not exceed the lesser of 

11 $1,000,000 or 1 percent of the aver12 age annual gross receipts of the tax13 payer for the 3 taxable years pre14 ceding the taxable year in which the 

15 contract was completed, and 

16 ‘‘(II) which is completed within 2 

17 years of the contract commencement 

18 date. 

19 For purposes of this subparagraph, rules simi20 lar to the rules of subsections (e)(2) and (f)(3) 

21 shall apply.’’. 

22 (b) EFFECTIVE DATE.—The amendments made by 

23 this section shall apply to contracts completed in taxable 

24 years ending after the date of the enactment of this Act. 


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1 SEC. 104. USE OF CASH METHOD OF ACCOUNTING FOR CER2 TAIN SMALL BUSINESSES. 

3 (a) IN GENERAL.—Section 446 of the Internal Rev4 enue Code of 1986 is amended by adding at the end the 

5 following new subsection: 

6 ‘‘(g) USE OF CASH METHOD OF ACCOUNTING BY

7 CERTAIN TAXPAYERS.— 

8 ‘‘(1) IN GENERAL.—Notwithstanding section 

9 471 and subject to such regulations as the Secretary 

10 may provide, a qualifying small business taxpayer 

11 may use the cash receipts and disbursements method 

12 of accounting. 

13 ‘‘(2) QUALIFYING SMALL BUSINESS TAX14 PAYER.—For purposes of this subsection, the term 

15 ‘qualifying small business taxpayer’ means a tax16 payer which— 

17 ‘‘(A) meets the gross receipts test under 

18 section 448(c) (determined by substituting 

19 ‘$10,000,000’ for ‘$5,000,000’ each place it ap20 pears therein), 

21 ‘‘(B) is not prohibited from using the cash 

22 receipts and disbursement method of accounting 

23 under section 448, and 

24 ‘‘(C) meets the requirements described in 

25 section 4.01 of Revenue Procedure 2002–28.’’. 


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1 (b) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to taxable years beginning after 

3 the date of the enactment of this Act. 

4 TITLE II—S CORPORATION 

5 PARITY 

6 SEC. 201. REDUCED RECOGNITION PERIOD FOR BUILT-IN 

7 GAINS. 

8 (a) IN GENERAL.—Paragraph (7) of section 1374(d) 

9 of the Internal Revenue Code of 1986 (relating to defini10 tions and special rules) is amended to read as follows: 

11 ‘‘(7) RECOGNITION PERIOD.—The term ‘rec12 ognition period’ means the 7-year period beginning 

13 with the 1st day of the 1st taxable year for which 

14 the corporation was an S corporation. For purposes 

15 of applying this section to any amount includible in 

16 income by reason of distributions to shareholders 

17 pursuant to section 593(e), the preceding sentence 

18 shall be applied without regard to the duration of 

19 the recognition period in effect on the date of such 

20 distribution.’’. 

21 (b) EFFECTIVE DATE.— 

22 (1) GENERAL RULE.—The amendment made by 

23 this section shall apply to any recognition period in 

24 effect on or after the date of the enactment of this 

25 Act. 


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1 (2) SPECIAL APPLICATION TO EXISTING PERI2 ODS EXCEEDING 7 YEARS.—Any recognition period 

3 in effect on the date of the enactment of this Act, 

4 the length of which is greater than 7 years, shall end 

5 on such date. 

6 SEC. 202. MODIFICATION TO S CORPORATION PASSIVE IN7 VESTMENT INCOME RULES. 

8 (a) INCREASED PERCENTAGE LIMIT.—Paragraph (2) 

9 of section 1375(a) of the Internal Revenue Code of 1986 

10 is amended by striking ‘‘25 percent’’ and inserting ‘‘60 

11 percent’’. 

12 (b) REPEAL OF EXCESSIVE PASSIVE INVESTMENT

13 INCOME AS A TERMINATION EVENT.— 

14 (1) IN GENERAL.—Section 1362(d) of the In15 ternal Revenue Code of 1986 is amended by striking 

16 paragraph (3). 

17 (2) CONFORMING AMENDMENT.—Subsection (b) 

18 of section 1375 of such Code is amended by striking 

19 paragraphs (3) and (4) and inserting the following 

20 new paragraph: 

21 ‘‘(3) PASSIVE INVESTMENT INCOME DE22 FINED.— 

23 ‘‘(A) IN GENERAL.—Except as otherwise 

24 provided in this paragraph, the term ‘passive 

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1 rived from royalties, rents, dividends, interest, 

2 and annuities. 

3 ‘‘(B) EXCEPTION FOR INTEREST ON

4 NOTES FROM SALES OF INVENTORY.—The term 

5 ‘passive investment income’ shall not include in6 terest on any obligation acquired in the ordi7 nary course of the corporation’s trade or busi8 ness from its sale of property described in sec9 tion 1221(a)(1). 

10 ‘‘(C) TREATMENT OF CERTAIN LENDING

11 OR FINANCE COMPANIES.—If the S corporation 

12 meets the requirements of section 542(c)(6) for 

13 the taxable year, the term ‘passive investment 

14 income’ shall not include gross receipts for the 

15 taxable year which are derived directly from the 

16 active and regular conduct of a lending or fi17 nance business (as defined in section 

18 542(d)(1)). 

19 ‘‘(D) TREATMENT OF CERTAIN DIVI20 DENDS.—If an S corporation holds stock in a 

21 C corporation meeting the requirements of sec22 tion 1504(a)(2), the term ‘passive investment 

23 income’ shall not include dividends from such C 

24 corporation to the extent such dividends are at25 tributable to the earnings and profits of such C 


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1 corporation derived from the active conduct of 

2 a trade or business. 

3 ‘‘(E) EXCEPTION FOR BANKS, ETC.—In 

4 the case of a bank (as defined in section 581), 

5 a bank holding company (within the meaning of 

6 section 2(a) of the Bank Holding Company Act 

7 of 1956 (12 U.S.C. 1841(a))), or a financial 

8 holding company (within the meaning of section 

9 2(p) of such Act (12 U.S.C. 1841(p))), the 

10 term ‘passive investment income’ shall not in11 clude— 

12 ‘‘(i) interest income earned by such 

13 bank or company, or 

14 ‘‘(ii) dividends on assets required to 

15 be held by such bank or company, includ16 ing stock in the Federal Reserve Bank, the 

17 Federal Home Loan Bank, or the Federal 

18 Agricultural Mortgage Bank or participa19 tion certificates issued by a Federal Inter20 mediate Credit Bank. 

21 ‘‘(F) COORDINATION WITH SECTION

22 1374.—The amount of passive investment in23 come shall be determined by not taking into ac24 count any recognized built-in gain or loss of the 

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1 ognition period. Terms used in the preceding 

2 sentence shall have the same respective mean3 ings as when used in section 1374.’’. 

4 (c) OTHER CONFORMING AMENDMENTS.— 

5 (1) Subparagraph (J) of section 26(b)(2) of the 

6 Internal Revenue Code of 1986 is amended by strik7 ing ‘‘25 percent’’ and inserting ‘‘60 percent’’. 

8 (2) Clause (i) of section 1042(c)(4)(A) of such 

9 Code is amended by striking ‘‘section 

10 1362(d)(3)(C)’’ and inserting ‘‘section 1375(b)(3)’’. 

11 (3) Subparagraph (B) of section 1362(f)(1) of 

12 such Code is amended by striking ‘‘or (3)’’. 

13 (4) Clause (i) of section 1375(b)(1)(A) of such 

14 Code is amended by striking ‘‘25 percent’’ and in15 serting ‘‘60 percent’’. 

16 (5) The heading for section 1375 of such Code 

17 is amended by striking ‘‘25 PERCENT’’ and insert18 ing ‘‘60 PERCENT’’. 

19 (6) The item relating to section 1375 in the 

20 table of sections for part III of subchapter S of 

21 chapter 1 of such Code is amended by striking ‘‘25 

22 percent’’ and inserting ‘‘60 percent’’. 

23 (d) EFFECTIVE DATE.—The amendments made by 

24 this section shall apply to taxable years beginning after 

25 the date of the enactment of this Act. 


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1 SEC. 203. NONRESIDENT ALIENS ALLOWED TO BE SHARE2 HOLDERS. 

3 (a) NONRESIDENT ALIENS ALLOWED TO BE SHARE4 HOLDERS.— 

5 (1) IN GENERAL.—Paragraph (1) of section 

6 1361(b) of the Internal Revenue Code of 1986 (de7 fining small business corporation) is amended— 

8 (A) by adding ‘‘and’’ at the end of sub9 paragraph (B), 

10 (B) by striking subparagraph (C), and 

11 (C) by redesignating subparagraph (D) as 

12 subparagraph (C). 

13 (2) CONFORMING AMENDMENTS.— 

14 (A) Paragraph (4) and (5)(A) of section 

15 1361(c) of such Code (relating to special rules 

16 for applying subsection (b)) are each amended 

17 by striking ‘‘subsection (b)(1)(D)’’ and insert18 ing ‘‘subsection (b)(1)(C)’’. 

19 (B) Clause (i) of section 280G(b)(5)(A) of 

20 such Code (relating to general rule for exemp21 tion for small business corporations, etc.) is 

22 amended by striking ‘‘but without regard to 

23 paragraph (1)(C) thereof’’. 

24 (b) NONRESIDENT ALIEN SHAREHOLDER TREATED

25 AS ENGAGED IN TRADE OR BUSINESS WITHIN UNITED

26 STATES.— 


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1 (1) IN GENERAL.—Section 875 of the Internal 

2 Revenue Code of 1986 is amended— 

3 (A) by striking ‘‘and’’ at the end of para4 graph (1), 

5 (B) by striking the period at the end of 

6 paragraph (2) and inserting ‘‘, and’’, and 

7 (C) by adding at the end the following new 

8 paragraph: 

9 ‘‘(3) a nonresident alien individual shall be con10 sidered as being engaged in a trade or business 

11 within the United States if the S corporation of 

12 which such individual is a shareholder is so en13 gaged.’’. 

14 (2) PRO RATA SHARE OF S CORPORATION IN15 COME.—The last sentence of section 1441(b) of such 

16 Code (relating to income items) is amended to read 

17 as follows: ‘‘In the case of a nonresident alien indi18 vidual who is a member of a domestic partnership or 

19 a shareholder of an S corporation, the items of in20 come referred to in subsection (a) shall be treated 

21 as referring to items specified in this subsection in22 cluded in his distributive share of the income of such 

23 partnership or in his pro rata share of the income 

24 of such S corporation.’’. 


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1 (3) APPLICATION OF WITHHOLDING TAX ON

2 NONRESIDENT ALIEN SHAREHOLDERS.—Section 

3 1446 of such Code (relating to withholding tax on 

4 foreign partners’ share of effectively connected in5 come) is amended by redesignating subsection (f) as 

6 subsection (g) and by inserting after subsection (e) 

7 the following new subsection: 

8 ‘‘(f) S CORPORATION TREATED AS PARTNERSHIP, 

9 ETC.—For purposes of this section— 

10 ‘‘(1) an S corporation shall be treated as a 

11 partnership, 

12 ‘‘(2) the shareholders of such corporation shall 

13 be treated as partners of such partnership, 

14 ‘‘(3) any reference to section 704 shall be treat15 ed as a reference to section 1366, and 

16 ‘‘(4) no withholding tax under subsection (a) 

17 shall be required in the case of any income realized 

18 by such corporation and allocable to a shareholder 

19 which is an electing small business trust (as defined 

20 in section 1361(e)).’’. 

21 (4) CONFORMING AMENDMENTS.— 

22 (A) The heading of section 875 of such 

23 Code is amended to read as follows: 


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1 ‘‘SEC. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES 

2 AND TRUSTS; S CORPORATIONS.’’. 

3 (B) The heading of section 1446 of such 

4 Code is amended to read as follows: 

5 ‘‘SEC. 1446. WITHHOLDING TAX ON FOREIGN PARTNERS’

6 AND S CORPORATION SHAREHOLDERS’

7 SHARE OF EFFECTIVELY CONNECTED IN8 COME.’’. 

9 (5) CLERICAL AMENDMENTS.— 

10 (A) The item relating to section 875 in the 

11 table of sections for subpart A of part II of 

12 subchapter N of chapter 1 of such Code is 

13 amended to read as follows: 

‘‘Sec. 875. Partnerships; beneficiaries of estates and trusts; S corporations.’’. 

14 (B) The item relating to section 1446 in 

15 the table of sections for subchapter A of chap16 ter 3 of such Code is amended to read as fol17 lows: 

‘‘Sec. 1446. Withholding tax on foreign partners’ and S corporation shareholders’ share of effectively connected income.’’. 

18 (C) PERMANENT ESTABLISHMENT OF

19 PARTNERS AND S CORPORATION SHARE20 HOLDERS.—Section 894 of such Code (relating 

21 to income affected by treaty) is amended by re22 designating subsection (c) as subsection (d) and 


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1 by inserting after subsection (b) the following 

2 new subsection: 

3 ‘‘(c) PERMANENT ESTABLISHMENT OF PARTNERS

4 AND S CORPORATION SHAREHOLDERS.—If a partnership 

5 or S corporation has a permanent establishment in the 

6 United States (within the meaning of a treaty to which 

7 the United States is a party) at any time during a taxable 

8 year of such entity, a nonresident alien individual or for9 eign corporation which is a partner in such partnership, 

10 or a nonresident alien individual who is a shareholder in 

11 such S corporation, shall be treated as having a permanent 

12 establishment in the United States for purposes of such 

13 treaty.’’. 

14 (c) APPLICATION OF OTHER WITHHOLDING TAX

15 RULES ON NONRESIDENT ALIEN SHAREHOLDERS.— 

16 (1) SECTION 1441.—Section 1441 of the Inter17 nal Revenue Code of 1986 (relating to withholding 

18 of tax on nonresident aliens) is amended by redesig19 nating subsection (g) as subsection (h) and by in20 serting after subsection (f) the following new sub21 section: 

22 ‘‘(g) S CORPORATION TREATED AS PARTNERSHIP, 

23 ETC.—For purposes of this section— 

24 ‘‘(1) an S corporation shall be treated as a 

25 partnership, 


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1 ‘‘(2) the shareholders of such corporation shall 

2 be treated as partners of such partnership, and 

3 ‘‘(3) no deduction or withholding under sub4 section (a) shall be required in the case of any item 

5 of income realized by such corporation and allocable 

6 to a shareholder which is an electing small business 

7 trust (as defined in section 1361(e)).’’. 

8 (2) SECTION 1445.—Section 1445(e) of such 

9 Code (relating to special rules relating to distribu10 tions, etc., by corporations, partnerships, trusts, or 

11 estates) is amended by redesignating paragraph (6) 

12 as paragraph (7) and by inserting after paragraph 

13 (5) the following new paragraph: 

14 ‘‘(6) S CORPORATION TREATED AS PARTNER15 SHIP, ETC.—For purposes of this section— 

16 ‘‘(A) an S corporation shall be treated as 

17 a partnership, and 

18 ‘‘(B) the shareholders of such corporation 

19 shall be treated as partners of such partnership, 

20 and 

21 ‘‘(C) no deduction or withholding under 

22 subsection (a) shall be required in the case of 

23 any gain realized by such corporation and allo24 cable to a shareholder which is an electing small 

25 business trust (as defined in section 1361(e)).’’. 


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1 (d) ADDITIONAL CONFORMING AMENDMENTS.— 

2 (1) Section 1361(c)(2)(A)(i) of the Internal 

3 Revenue Code of 1986 is amended by striking ‘‘who 

4 is a citizen or resident of the United States’’. 

5 (2) Section 1361(d)(3)(B) of such Code is 

6 amended by striking ‘‘who is a citizen or resident of 

7 the United States’’. 

8 (3) Section 1361(e)(2) of such Code is amended 

9 by inserting ‘‘(including a nonresident alien)’’ after 

10 ‘‘person’’ the first place it appears. 

11 (e) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to taxable years beginning after 

13 the date of the enactment of this Act. 

14 SEC. 204. EXPANSION OF S CORPORATION ELIGIBLE 

15 SHAREHOLDERS TO INCLUDE IRAS. 

16 (a) IN GENERAL.—Clause (vi) of section 

17 1361(c)(2)(A) of the Internal Revenue Code of 1986 (re18 lating to certain trusts permitted as shareholders) is 

19 amended to read as follows: 

20 ‘‘(vi) A trust which constitutes an in21 dividual retirement account under section 

22 408(a), including one designated as a Roth 

23 IRA under section 408A.’’. 

24 (b) SALE OF STOCK IN IRA RELATING TO S COR25 PORATION ELECTION EXEMPT FROM PROHIBITED


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1 TRANSACTION RULES.—Paragraph (16) of section 

2 4975(d) of the Internal Revenue Code of 1986 (relating 

3 to exemptions) is amended to read as follows: 

4 ‘‘(16) a sale of stock held by a trust which con5 stitutes an individual retirement account under sec6 tion 408(a) to the individual for whose benefit such 

7 account is established if— 

8 ‘‘(A) such sale is pursuant to an election 

9 under section 1362(a) by the issuer of such 

10 stock, 

11 ‘‘(B) such sale is for fair market value at 

12 the time of sale (as established by an inde13 pendent appraiser) and the terms of the sale 

14 are otherwise at least as favorable to such trust 

15 as the terms that would apply on a sale to an 

16 unrelated party, 

17 ‘‘(C) such trust does not pay any commis18 sions, costs, or other expenses in connection 

19 with the sale, and 

20 ‘‘(D) the stock is sold in a single trans21 action for cash not later than 120 days after 

22 the S corporation election is made.’’. 

23 (c) EFFECTIVE DATE.—The amendments made by 

24 this section shall take effect on the date of the enactment 

25 of this Act. 


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1 TITLE III—PENSION PLAN 

2 INCENTIVES AND PARITY 

3 SEC. 301. CREDIT FOR QUALIFIED PENSION PLAN CON4 TRIBUTIONS OF SMALL EMPLOYERS. 

5 (a) IN GENERAL.—Subpart D of part IV of sub6 chapter A of chapter 1 of the Internal Revenue Code of 

7 1986 (relating to business related credits) is amended by 

8 adding at the end the following new section: 

9 ‘‘SEC. 45N. SMALL EMPLOYER PENSION PLAN CONTRIBU10 TIONS. 

11 ‘‘(a) GENERAL RULE.—For purposes of section 38, 

12 in the case of an eligible employer, the small employer pen13 sion plan contribution credit determined under this section 

14 for any taxable year is an amount equal to 50 percent 

15 of the amount which would (but for subsection (f)(1)) be 

16 allowed as a deduction under section 404 for such taxable 

17 year for qualified employer contributions made to any 

18 qualified retirement plan on behalf of any employee who 

19 is not a highly compensated employee. 

20 ‘‘(b) CREDIT LIMITED TO 3 YEARS.—The credit al21 lowable by this section shall be allowed only with respect 

22 to the period of 3 taxable years beginning with the first 

23 taxable year for which a credit is allowable with respect 

24 to a plan under this section. 


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1 ‘‘(c) QUALIFIED EMPLOYER CONTRIBUTION.—For 

2 purposes of this section— 

3 ‘‘(1) DEFINED CONTRIBUTION PLANS.—In the 

4 case of a defined contribution plan, the term ‘quali5 fied employer contribution’ means the amount of 

6 nonelective and matching contributions to the plan 

7 made by the employer on behalf of any employee 

8 who is not a highly compensated employee to the ex9 tent such amount does not exceed 3 percent of such 

10 employee’s compensation from the employer for the 

11 year. 

12 ‘‘(2) DEFINED BENEFIT PLANS.—In the case of 

13 a defined benefit plan, the term ‘qualified employer 

14 contribution’ means the amount of employer con15 tributions to the plan made on behalf of any em16 ployee who is not a highly compensated employee to 

17 the extent that the accrued benefit of such employee 

18 derived from employer contributions for the year 

19 does not exceed the equivalent (as determined under 

20 regulations prescribed by the Secretary and without 

21 regard to contributions and benefits under the Social 

22 Security Act) of 3 percent of such employee’s com23 pensation from the employer for the year. 

24 ‘‘(d) QUALIFIED RETIREMENT PLAN.— 


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1 ‘‘(1) IN GENERAL.—The term ‘qualified retire2 ment plan’ means any plan described in section 

3 401(a) which includes a trust exempt from tax 

4 under section 501(a) if the plan meets— 

5 ‘‘(A) the contribution requirements of 

6 paragraph (2), 

7 ‘‘(B) the vesting requirements of para8 graph (3), and 

9 ‘‘(C) the distribution requirements of para10 graph (4). 

11 ‘‘(2) CONTRIBUTION REQUIREMENTS.— 

12 ‘‘(A) IN GENERAL.—The requirements of 

13 this paragraph are met if, under the plan— 

14 ‘‘(i) the employer is required to make 

15 nonelective contributions of at least 1 per16 cent of compensation (or the equivalent 

17 thereof in the case of a defined benefit 

18 plan) for each employee who is not a high19 ly compensated employee who is eligible to 

20 participate in the plan, and 

21 ‘‘(ii) allocations of nonelective em22 ployer contributions, in the case of a de23 fined contribution plan, are either in equal 

24 dollar amounts for all employees covered 

25 by the plan or bear a uniform relationship 


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1 to the total compensation, or the basic or 

2 regular rate of compensation, of the em3 ployees covered by the plan (and an equiv4 alent requirement is met with respect to a 

5 defined benefit plan). 

6 ‘‘(B) COMPENSATION LIMITATION.—The 

7 compensation taken into account under sub8 paragraph (A) for any year shall not exceed the 

9 limitation in effect for such year under section 

10 401(a)(17). 

11 ‘‘(3) VESTING REQUIREMENTS.—The require12 ments of this paragraph are met if the plan satisfies 

13 the requirements of either of the following subpara14 graphs: 

15 ‘‘(A) 3-YEAR VESTING.—A plan satisfies 

16 the requirements of this subparagraph if an em17 ployee who has completed at least 3 years of 

18 service has a nonforfeitable right to 100 percent 

19 of the employee’s accrued benefit derived from 

20 employer contributions. 

21 ‘‘(B) 5-YEAR GRADED VESTING.—A plan 

22 satisfies the requirements of this subparagraph 

23 if an employee has a nonforfeitable right to a 

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1 rived from employer contributions determined 

2 under the following table: 

The nonforfeitable 

‘‘Years of service: percentage is: 

1 ............................................................................................... 20

2 ............................................................................................... 40

3 ............................................................................................... 60

4 ............................................................................................... 80

5 ............................................................................................... 100. 

3 ‘‘(4) DISTRIBUTION REQUIREMENTS.—In the 

4 case of a profit-sharing or stock bonus plan, the re5 quirements of this paragraph are met if, under the 

6 plan, qualified employer contributions are distribut7 able only as provided in section 401(k)(2)(B). 

8 ‘‘(e) OTHER DEFINITIONS.—For purposes of this 

9 section— 

10 ‘‘(1) ELIGIBLE EMPLOYER.— 

11 ‘‘(A) IN GENERAL.—The term ‘eligible em12 ployer’ means, with respect to any year, an em13 ployer which has no more than 25 employees 

14 who received at least $5,000 of compensation 

15 from the employer for the preceding year. 

16 ‘‘(B) REQUIREMENT FOR NEW QUALIFIED

17 EMPLOYER PLANS.—Such term shall not in18 clude an employer if, during the 3-taxable year 

19 period immediately preceding the 1st taxable 

20 year for which the credit under this section is 

21 otherwise allowable for a qualified employer 

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1 ber of any controlled group including the em2 ployer (or any predecessor of either) established 

3 or maintained a qualified employer plan with 

4 respect to which contributions were made, or 

5 benefits were accrued, for substantially the 

6 same employees as are in the qualified employer 

7 plan. 

8 ‘‘(2) HIGHLY COMPENSATED EMPLOYEE.—The 

9 term ‘highly compensated employee’ has the mean10 ing given such term by section 414(q) (determined 

11 without regard to section 414(q)(1)(B)(ii)). 

12 ‘‘(f) SPECIAL RULES.— 

13 ‘‘(1) DISALLOWANCE OF DEDUCTION.—No de14 duction shall be allowed for that portion of the quali15 fied employer contributions paid or incurred for the 

16 taxable year which is equal to the credit determined 

17 under subsection (a). 

18 ‘‘(2) ELECTION NOT TO CLAIM CREDIT.—This 

19 section shall not apply to a taxpayer for any taxable 

20 year if such taxpayer elects to have this section not 

21 apply for such taxable year. 

22 ‘‘(3) AGGREGATION RULES.—All persons treat23 ed as a single employer under subsection (a) or (b) 

24 of section 52, or subsection (n) or (o) of section 414, 


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•S 3857 IS

1 shall be treated as one person. All eligible employer 

2 plans shall be treated as 1 eligible employer plan. 

3 ‘‘(g) RECAPTURE OF CREDIT ON FORFEITED CON4 TRIBUTIONS.— 

5 ‘‘(1) IN GENERAL.—Except as provided in para6 graph (2), if any accrued benefit which is forfeitable 

7 by reason of subsection (d)(3) is forfeited, the em8 ployer’s tax imposed by this chapter for the taxable 

9 year in which the forfeiture occurs shall be increased 

10 by 35 percent of the employer contributions from 

11 which such benefit is derived to the extent such con12 tributions were taken into account in determining 

13 the credit under this section. 

14 ‘‘(2) REALLOCATED CONTRIBUTIONS.—Para15 graph (1) shall not apply to any contribution which 

16 is reallocated by the employer under the plan to em17 ployees who are not highly compensated employees.’’. 

18 (b) CREDIT ALLOWED AS PART OF GENERAL BUSI19 NESS CREDIT.—Section 38(b) of the Internal Revenue 

20 Code of 1986 (defining current year business credit) is 

21 amended by striking ‘‘plus’’ at the end of paragraph (29), 

22 by striking the period at the end of paragraph (30) and 

23 inserting ‘‘, plus’’, and by adding at the end the following 

24 new paragraph: 


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•S 3857 IS

1 ‘‘(31) in the case of an eligible employer (as de2 fined in section 45E(e)), the small employer pension 

3 plan contribution credit determined under section 

4 45M(a).’’ 

5 (c) CONFORMING AMENDMENTS.— 

6 (1) Subsection (c) of section 196 of the Internal 

7 Revenue Code of 1986 is amended by striking ‘‘and’’ 

8 at the end of paragraph (12), by striking the period 

9 at the end of paragraph (13) and inserting ‘‘, and’’, 

10 and by adding at the end the following new para11 graph: 

12 ‘‘(14) the small employer pension plan contribu13 tion credit determined under section 45E(a).’’ 

14 (2) The table of sections for subpart D of part 

15 IV of subchapter A of chapter 1 of such Code is 

16 amended by adding at the end the following new 

17 item: 

‘‘Sec. 45M. Small employer pension plan contributions.’’. 

18 (d) EFFECTIVE DATE.—The amendments made by 

19 this section shall apply to contributions paid or incurred 

20 in taxable years beginning after December 31, 2006. 

21 SEC. 302. DEDUCTION FOR PENSION CONTRIBUTIONS AL22 LOWED IN COMPUTING NET EARNINGS FROM 

23 SELF-EMPLOYMENT. 

24 (a) IN GENERAL.—Section 1402(a) of the Internal 

25 Revenue Code of 1986 (defining net earnings from selfVerDate Aug 31 2005 23:32 Sep 12, 2006 Jkt 049200 PO 00000 Frm 00026 Fmt 6652 Sfmt 6201 E:\BILLS\S3857.IS S3857

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•S 3857 IS

1 employment) is amended by striking ‘‘and’’ at the end of 

2 paragraph (15), by striking the period at the end of para3 graph (16) and inserting ‘‘, and’’, and by inserting after 

4 paragraph (16) the following new paragraph: 

5 ‘‘(17) any deduction allowed under section 404 

6 by reason of section 404(a)(8)(C) shall be allowed, 

7 except that the amount of such deduction shall be 

8 determined without regard to this paragraph.’’. 

9 (b) EFFECTIVE DATE.—The amendments made by 

10 this section shall apply to taxable years beginning after 

11 December 31, 2006. 

12 TITLE IV—HEALTH INSURANCE 

13 COSTS PARITY 

14 SEC. 401. DEDUCTION FOR HEALTH INSURANCE COSTS AL15 LOWED IN COMPUTING NET EARNINGS FROM 

16 SELF-EMPLOYMENT. 

17 (a) IN GENERAL.—Section 1402(a) of the Internal 

18 Revenue Code of 1986 (defining net earnings from self19 employment), as amended by section 302, is amended by 

20 striking ‘‘and’’ at the end of paragraph (16), by striking 

21 the period at the end of paragraph (17) and inserting ‘‘, 

22 and’’, and by inserting after paragraph (17) the following 

23 new paragraph: 

24 ‘‘(18) any deduction allowed under section 

25 162(l) shall be allowed.’’. 


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•S 3857 IS

1 (b) CONFORMING AMENDMENT.—Section 162(l) of 

2 the Internal Revenue Code of 1986 (relating to special 

3 rule for health insurance costs of self-employed individ4 uals) is amended by striking paragraph (4) and by redes5 ignating paragraph (5) as paragraph (4). 

6 (c) EFFECTIVE DATE.—The amendments made by 

7 this section shall apply to taxable years beginning after 

8 December 31, 2006. 

Æ 


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