American Job Creations Act 2004

American Job Creations Act 2004

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American Jobs Creation Act 0f 2004

House Ways and Means Committee Summary of the Conference Report on HR 4520, the American Jobs Creation Act of 2004

October 12, 2004

108th Congress

Committee on Ways and Means

Conference Report on H.R. 4520,

The American Jobs Creation Act of 2004

Ends Sanctions and Provides Tax Benefits for Manufacturing

 Repeals FSC-ETI. Provides more than $8 billion of transition relief over three years (2004-2006).

 Provides a 9 percent tax deduction (equivalent to a 3 percent rate cut) on all domestic manufacturing activity. The deduction is available to C corporations, S corporations, partnerships, sole proprietorships, cooperatives, and estates and trusts. Includes an AMT hold harmless.

Tax Incentives for Businesses and Job Creators

 Extends enhanced section 179 expensing so that small businesses can immediately expense up to $100,000 of new investments through 2007.

 Reduces the depreciation period for restaurants and leasehold improvements from 39 years to 15 years.

 Provides 10 provisions to simplify the tax treatment of S corporations and to make it easier for businesses to qualify as S corporations.

 Enhances community revitalization incentives in economically distressed regions by enhancing eligibility criteria for Renewal Communities and the New Markets Tax Credit.

 Includes numerous other tax relief provisions, such as repeal of the 4.3-cent fuel excise tax, temporary suspension of the special occupational tax on small businesses, an elective tonnage tax system for international shipping income, and a 50 percent tax credit for railroad track maintenance.

Tax Relief for Farmers and Small Manufacturers

 Extends ethanol subsidies through 2010 and fully compensates the Highway Trust Fund for the cost of these subsidies. Creates new biodiesel tax subsidies through 2006.

 Ensures that farmers and fishermen are not hit by the Alternative Minimum Tax ( AMT ) when they use income averaging to smooth out fluctuations in their annual incomes.

 Provides several tax relief provisions for timber including: (1) capital gains treatment for outright sales of timber, (2) safe harbor rules for timber REITs, (3) expensing of reforestation costs, and (4) an election to treat timber as a sale or exchange.

 Increases the number of small manufacturers eligible for Industrial Development Bond financing by increasing the capital expenditure limit from $10 million to $20 million.

 Reduces or repeals excise taxes that create a competitive disadvantage for small manufacturers.

 Extends 50-percent bonus depreciation for small aircraft by one year.

 Provides tax incentives for small business refiners to help them comply with the Environmental Protection Agency's sulfur regulations.

Tax Reform and Simplification for U.S. Businesses

 Includes several provisions to reduce double taxation of U.S.-based companies, such as reducing the foreign tax credit (FTC) baskets from nine to two and allowing FTCs to be carried forward for 10 years instead of five.

 Repeals the 90-percent limitation on the use of FTCs against the alternative minimum tax.

 Encourages companies to reinvest foreign earnings in the United States by temporarily taxing repatriated income at 5.25 percent.

Other Provisions

 Allows taxpayers to deduct state and local sales taxes instead of state income taxes for 2004 and 2005. Taxpayers may deduct their actual sales taxes or used IRS -published tables.

 Repeals the government-run tobacco quota program. Tobacco farmers and quota holders receive transitional assistance payments over 10 years financed with assessments on tobacco companies. Program cost is capped at $10.14 billion.

 Expands the section 45 electricity production credit and allows it against the AMT .

 Two-year suspension of section 815.

 Two-year suspension of duties on ceiling fans, steam generators, and reactor vessel heads and pressures (i.e., products with absolutely no U.S. production).

The Conference Report is revenue neutral.

 Costs are offset by:

1. Reducing tax avoidance through corporate inversions and individual expatriation,

2. Shutting down abusive tax shelters,

3. Closing corporate tax loopholes,

4. Combating fuel tax evasion,

5. Clarifying the tax treatment of executive deferred compensation plans,

6. Extending IRS user fees, and

7. Extending customs user fees.

PL, P.L. 108-357, American Jobs Creation Act of 2004, Enrolled, , (October 21, 2004), Part 01 of 04, October 21, 2004 , 108th CongressH. R. 4520

One Hundred Eighth Congress of the United States of America

AT THE SECOND SESSION

Begun and held at the City of Washington on Tuesday, the twentieth day of January, two thousand and four

An Act

To amend the Internal Revenue Code of 1986 to remove impediments in such Code and make our manufacturing, service, and high-technology businesses and workers more competitive and productive both at home and abroad.

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

SECTION 1. SHORT TITLE; ETC .

(a) SHORT TITLE. --This Act may be cited as the "American Jobs Creation Act of 2004".

(b) AMENDMENT OF 1986 CODE. --Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

(c) TABLE OF CONTENTS. --The table of contents of this Act is as follows:

Sec. 1. Short title; etc.

  TITLE I --PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME

Sec.    Repeal of exclusion for extraterritorial income.

101.

Sec.    Deduction relating to income attributable to domestic production

102.    activities.

                         TITLE II --BUSINESS TAX INCENTIVES

                       Subtitle A --Small Business Expensing

Sec.    2-year extension of increased expensing for small business.

201.

                             Subtitle B --Depreciation

Sec.    Recovery period for depreciation of certain leasehold improvements and

211.    restaurant property.

                       Subtitle C --Community Revitalization

Sec.    Modification of targeted areas and low-income communities for new markets

221.    tax credit.

Sec.    Expansion of designated renewal community area based on 2000 census data.

222.

Sec.    Modification of income requirement for census tracts within high migration

223.    rural counties.

                Subtitle D --S Corporation Reform and Simplification

Sec.    Members of family treated as 1 shareholder.

231.

Sec.    Increase in number of eligible shareholders to 100.

232.

Sec.    Expansion of bank S corporation eligible shareholders to include IRAs.

233.

Sec.    Disregard of unexercised powers of appointment in determining potential

234.    current beneficiaries of ESBT.

Sec.    Transfer of suspended losses incident to divorce, etc.

235.

Sec.    Use of passive activity loss and at-risk amounts by qualified subchapter S

236.    trust income beneficiaries.

Sec.    Exclusion of investment securities income from passive income test for bank

237.    S corporations.

Sec.    Relief from inadvertently invalid qualified subchapter S subsidiary

238.    elections and terminations.

Sec.    Information returns for qualified subchapter S subsidiaries.

239.

Sec.    Repayment of loans for qualifying employer securities.

240.

                       Subtitle E --Other Business Incentives

Sec.    Phaseout of 4.3-cent motor fuel excise taxes on railroads and inland

241.    waterway transportation which remain in general fund.

Sec.    Modification of application of income forecast method of depreciation.

242.

Sec.    Improvements related to real estate investment trusts.

243.

Sec.    Special rules for certain film and television productions.

244.

Sec.    Credit for maintenance of railroad track.

245.

Sec.    Suspension of occupational taxes relating to distilled spirits, wine, and

246.    beer.

Sec.    Modification of unrelated business income limitation on investment in

247.    certain small business investment companies.

Sec.    Election to determine corporate tax on certain international shipping

248.    activities using per ton rate.

     Subtitle F --Stock Options and Employee Stock Purchase Plan Stock Options

Sec.    Exclusion of incentive stock options and employee stock purchase plan stock

251.    options from wages.

           TITLE 
III
 --TAX RELIEF FOR AGRICULTURE 
AND
 SMALL MANUFACTURERS

                 Subtitle A --Volumetric Ethanol Excise Tax Credit

Sec.    Alcohol and biodiesel excise tax credit and extension of alcohol fuels

301.    income tax credit.

Sec.    Biodiesel income tax credit.

302.

Sec.    Information reporting for persons claiming certain tax benefits.

303.

                        Subtitle B --Agricultural Incentives

Sec.    Special rules for livestock sold on account of weather-related conditions.

311.

Sec.    Payment of dividends on stock of cooperatives without reducing patronage

312.    dividends.

Sec.    Apportionment of small ethanol producer credit.

313.

Sec.    Coordinate farmers and fishermen income averaging and the alternative

314.    minimum tax.

Sec.    Capital gain treatment under section 631(b) to apply to outright sales by

315.    landowners.

Sec.    Modification to cooperative marketing rules to include value added

316.    processing involving animals.

Sec.    Extension of declaratory judgment procedures to farmers' cooperative

317.    organizations.

Sec.    Certain expenses of rural letter carriers.

318.

Sec.    Treatment of certain income of cooperatives.

319.

Sec.    Exclusion for payments to individuals under National Health Service Corps

320.    loan repayment program and certain State loan repayment programs.

Sec.    Modification of safe harbor rules for timber REITs.

321.

Sec.    Expensing of certain reforestation expenditures.

322.

                  Subtitle C --Incentives for Small Manufacturers

Sec.    Net income from publicly traded partnerships treated as qualifying income

331.    of regulated investment companies.

Sec.    Simplification of excise tax imposed on bows and arrows.

332.

Sec.    Reduction of excise tax on fishing tackle boxes.

333.

Sec.    Sonar devices suitable for finding fish.

334.

Sec.    Charitable contribution deduction for certain expenses incurred in support

335.    of Native Alaskan subsistence whaling.

Sec.    Modification of depreciation allowance for aircraft.

336.

Sec.    Modification of placed in service rule for bonus depreciation property.

337.

Sec.    Expensing of capital costs incurred in complying with Environmental

338.    Protection Agency sulfur regulations.

Sec.    Credit for production of low sulfur diesel fuel.

339.

Sec.    Expansion of qualified small-issue bond program.

340.

Sec.    Oil and gas from marginal wells.

341.

       TITLE IV --TAX REFORM 
AND
 SIMPLIFICATION FOR UNITED STATES BUSINESSES

Sec.    Interest expense allocation rules.

401.

Sec.    Recharacterization of overall domestic loss.

402.

Sec.    Look-thru rules to apply to dividends from noncontrolled section 902

403.    corporations.

Sec.    Reduction to 2 foreign tax credit baskets.

404.

Sec.    Attribution of stock ownership through partnerships to apply in determining

405.    section 902 and 960 credits.

Sec.    Clarification of treatment of certain transfers of intangible property.

406.

Sec.    United States property not to include certain assets of controlled foreign

407.    corporation.

Sec.    Translation of foreign taxes.

408.

Sec.    Repeal of withholding tax on dividends from certain foreign corporations.

409.

Sec.    Equal treatment of interest paid by foreign partnerships and foreign

410.    corporations.

Sec.    Treatment of certain dividends of regulated investment companies.

411.

Sec.    Look-thru treatment for sales of partnership interests.

412.

Sec.    Repeal of foreign personal holding company rules and foreign investment

413.    company rules.

Sec.    Determination of foreign personal holding company income with respect to

414.    transactions in commodities.

Sec.    Modifications to treatment of aircraft leasing and shipping income.

415.

Sec.    Modification of exceptions under subpart F for active financing.

416.

Sec.    10-year foreign tax credit carryover; 1-year foreign tax credit carryback.

417.

Sec.    Modification of the treatment of certain REIT distributions attributable to

418.    gain from sales or exchanges of United States real property interests.

Sec.    Exclusion of income derived from certain wagers on horse races and dog

419.    races from gross income of nonresident alien individuals.

Sec.    Limitation of withholding tax for Puerto Rico corporations.

420.

Sec.    Foreign tax credit under alternative minimum tax.

421.

Sec.    Incentives to reinvest foreign earnings in United States.

422.

Sec.    Delay in effective date of final regulations governing exclusion of income

423.    from international operation of ships or aircraft.

Sec.    Study of earnings stripping provisions.

424.

             TITLE V --DEDUCTION OF STATE 
AND
 LOCAL GENERAL SALES TAXES

Sec.    Deduction of State and local general sales taxes in lieu of State and local

501.    income taxes.

                    TITLE VI --FAIR 
AND
 EQUITABLE TOBACCO REFORM

Sec.    Short title.

601.

    Subtitle A --Termination of Federal Tobacco Quota and Price Support Programs

Sec.    Termination of tobacco quota program and related provisions.

611.

Sec.    Termination of tobacco price support program and related provisions.

612.

Sec.    Conforming amendments.

613.

Sec.    Continuation of liability for 2004 and earlier crop years.

614.

    Subtitle B --Transitional Payments to Tobacco Quota Holders and Producers of

                                      Tobacco

Sec.    Definitions.

621.

Sec.    Contract payments to tobacco quota holders.

622.

Sec.    Contract payments for producers of quota tobacco.

623.

Sec.    Administration.

624.

Sec.    Use of assessments as source of funds for payments.

625.

Sec.    Tobacco Trust Fund.

626.

Sec.    Limitation on total expenditures.

627.

                     Subtitle C --Implementation and Transition

Sec.    Treatment of tobacco loan pool stocks and outstanding loan costs.

641.

Sec.    Regulations.

642.

Sec.    Effective date.

643.

                        TITLE 
VII
 --MISCELLANEOUS PROVISIONS

Sec.    Brownfields demonstration program for qualified green building and

701.    sustainable design projects.

Sec.    Exclusion of gain or loss on sale or exchange of certain brownfield sites

702.    from unrelated business taxable income.

Sec.    Civil rights tax relief.

703.

Sec.    Modification of class life for certain track facilities.

704.

Sec.    Suspension of policyholders surplus account provisions.

705.

Sec.    Certain Alaska natural gas pipeline property treated as 7-year property.

706.

Sec.    Extension of enhanced oil recovery credit to certain Alaska facilities.

707.

Sec.    Method of accounting for naval shipbuilders.

708.

Sec.    Modification of minimum cost requirement for transfer of excess pension

709.    assets.

Sec.    Expansion of credit for electricity produced from certain renewable

710.    resources.

Sec.    Certain business credits allowed against regular and minimum tax.

711.

Sec.    Inclusion of primary and secondary medical strategies for children and

712.    adults with sickle cell disease as medical assistance under the Medicaid

        program.

Sec.    Ceiling fans.

713.

Sec.    Certain steam generators, and certain reactor vessel heads and

714.    pressurizers, used in nuclear facilities.

                          TITLE VIII --REVENUE PROVISIONS

  Subtitle A --Provisions to Reduce Tax Avoidance Through Individual and Corporate

                                    Expatriation

Sec.    Tax treatment of expatriated entities and their foreign parents.

801.

Sec.    Excise tax on stock compensation of insiders in expatriated corporations.

802.

Sec.    Reinsurance of United States risks in foreign jurisdictions.

803.

Sec.    Revision of tax rules on expatriation of individuals.

804.

Sec.    Reporting of taxable mergers and acquisitions.

805.

Sec.    Studies.

806.

                  Subtitle B --Provisions Relating to Tax Shelters

                        PART I --TAXPAYER-RELATED PROVISIONS

Sec.    Penalty for failing to disclose reportable transactions.

811.

Sec.    Accuracy-related penalty for listed transactions, other reportable

812.    transactions having a significant tax avoidance purpose, etc.

Sec.    Tax shelter exception to confidentiality privileges relating to taxpayer

813.    communications.

Sec.    Statute of limitations for taxable years for which required listed

814.    transactions not reported.

Sec.    Disclosure of reportable transactions.

815.

Sec.    Failure to furnish information regarding reportable transactions.

816.

Sec.    Modification of penalty for failure to maintain lists of investors.

817.

Sec.    Penalty on promoters of tax shelters.

818.

Sec.    Modifications of substantial understatement penalty for nonreportable

819.    transactions.

Sec.    Modification of actions to enjoin certain conduct related to tax shelters

820.    and reportable transactions.

Sec.    Penalty on failure to report interests in foreign financial accounts.

821.

Sec.    Regulation of individuals practicing before the Department of the Treasury.

822.

                             PART II --OTHER PROVISIONS

Sec.    Treatment of stripped interests in bond and preferred stock funds, etc.

831.

Sec.    Minimum holding period for foreign tax credit on withholding taxes on

832.    income other than dividends.

Sec.    Disallowance of certain partnership loss transfers.

833.

Sec.    No reduction of basis under section 734 in stock held by partnership in

834.    corporate partner.

Sec.    Repeal of special rules for FASITS.

835.

Sec.    Limitation on transfer or importation of built-in losses.

836.

Sec.    Clarification of banking business for purposes of determining investment of

837.    earnings in United States property.

Sec.    Denial of deduction for interest on underpayments attributable to

838.    nondisclosed reportable transactions.

Sec.    Clarification of rules for payment of estimated tax for certain deemed

839.    asset sales.

Sec.    Recognition of gain from the sale of a principal residence acquired in a

840.    like-kind exchange within 5 years of sale.

Sec.    Prevention of mismatching of interest and original issue discount

841.    deductions and income inclusions in transactions with related foreign

        persons.

Sec.    Deposits made to suspend running of interest on potential underpayments.

842.

Sec.    Partial payment of tax liability in installment agreements.

843.

Sec.    Affirmation of consolidated return regulation authority.

844.

Sec.    Expanded disallowance of deduction for interest on convertible debt.

845.

                                 PART 
III
 --LEASING

Sec.    Reform of tax treatment of certain leasing arrangements.

847.

Sec.    Limitation on deductions allocable to property used by governments or other

848.    tax-exempt entities.

Sec.    Effective date.

849.

                     Subtitle C --Reduction of Fuel Tax Evasion

Sec.    Exemption from certain excise taxes for mobile machinery.

851.

Sec.    Modification of definition of off-highway vehicle.

852.

Sec.    Taxation of aviation-grade kerosene.

853.

Sec.    Dye injection equipment.

854.

Sec.    Elimination of administrative review for taxable use of dyed fuel.

855.

Sec.    Penalty on untaxed chemically altered dyed fuel mixtures.

856.

Sec.    Termination of dyed diesel use by intercity buses.

857.

Sec.    Authority to inspect on-site records.

858.

Sec.    Assessable penalty for refusal of entry.

859.

Sec.    Registration of pipeline or vessel operators required for exemption of bulk

860.    transfers to registered terminals or refineries.

Sec.    Display of registration.

861.

Sec.    Registration of persons within foreign trade zones, etc.

862.

Sec.    Penalties for failure to register and failure to report.

863.

Sec.    Electronic filing of required information reports.

864.

Sec.    Taxable fuel refunds for certain ultimate vendors.

865.

Sec.    Two-party exchanges.

866.

Sec.    Modifications of tax on use of certain vehicles.

867.

Sec.    Dedication of revenues from certain penalties to the Highway Trust Fund.

868.

Sec.    Simplification of tax on tires.

869.

Sec.    Transmix and diesel fuel blend stocks treated as taxable fuel.

870.

Sec.    Study regarding fuel tax compliance.

871.

                       Subtitle D --Other Revenue Provisions

Sec.    Qualified tax collection contracts.

881.

Sec.    Treatment of charitable contributions of patents and similar property.

882.

Sec.    Increased reporting for noncash charitable contributions.

883.

Sec.    Donations of motor vehicles, boats, and airplanes.

884.

Sec.    Treatment of nonqualified deferred compensation plans.

885.

Sec.    Extension of amortization of intangibles to sports franchises.

886.

Sec.    Modification of continuing levy on payments to Federal vendors.

887.

Sec.    Modification of straddle rules.

888.

Sec.    Addition of vaccines against hepatitis A to list of taxable vaccines.

889.

Sec.    Addition of vaccines against influenza to list of taxable vaccines.

890.

Sec.    Extension of 
IRS
 user fees.

891.

Sec.    COBRA fees.

892.

Sec.    Prohibition on nonrecognition of gain through complete liquidation of

893.    holding company.

Sec.    Effectively connected income to include certain foreign source income.

894.

Sec.    Recapture of overall foreign losses on sale of controlled foreign

895.    corporation.

Sec.    Recognition of cancellation of indebtedness income realized on satisfaction

896.    of debt with partnership interest.

Sec.    Denial of installment sale treatment for all readily tradable debt.

897.

Sec.    Modification of treatment of transfers to creditors in divisive

898.    reorganizations.

Sec.    Clarification of definition of nonqualified preferred stock.

899.

Sec.    Modification of definition of controlled group of corporations.

900.

Sec.    Class lives for utility grading costs.

901.

Sec.    Consistent amortization of periods for intangibles.

902.

Sec.    Freeze of provisions regarding suspension of interest where Secretary fails

903.    to contact taxpayer.

Sec.    Increase in withholding from supplemental wage payments in excess of

904.    $1,000,000.

Sec.    Treatment of sale of stock acquired pursuant to exercise of stock options

905.    to comply with conflict-of-interest requirements.

Sec.    Application of basis rules to nonresident aliens.

906.

Sec.    Limitation of employer deduction for certain entertainment expenses.

907.

Sec.    Residence and source rules relating to United States possessions.

908.

Sec.    Sales or dispositions to implement Federal Energy Regulatory Commission or

909.    State electric restructuring policy.

Sec.    Expansion of limitation on depreciation of certain passenger automobiles.

910.

TITLE I --PROVISIONS RELATING TO REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME

SEC . 101. REPEAL OF EXCLUSION FOR EXTRATERRITORIAL INCOME.

(a) IN GENERAL. --Section 114 is hereby repealed.

(b) CONFORMING AMENDMENTS. --

(1) Subpart E of part III of subchapter N of chapter 1 (relating to qualifying foreign trade income) is hereby repealed.

(2) The table of subparts for such part III is amended by striking the item relating to subpart E.

(3) The table of sections for part III of subchapter B of chapter 1 is amended by striking the item relating to section 114.

(4) The second sentence of section 56(g)(4)(B)(i) is amended by striking "114 or".

(5) Section 275(a) is amended --

(A) by inserting "or" at the end of paragraph (4)(A), by striking "or" at the end of paragraph (4)(B) and inserting a period, and by striking subparagraph (C), and

(B) by striking the last sentence.

(6) Paragraph (3) of section 864(e) is amended --

(A) by striking:

"(3) TAX-EXEMPT ASSETS NOT TAKEN INTO ACCOUNT. --

"(A) IN GENERAL. --For purposes of"; and inserting:

"(3) TAX-EXEMPT ASSETS NOT TAKEN INTO ACCOUNT. --For purposes of", and

(B) by striking subparagraph (B).

(7) Section 903 is amended by striking "114, 164(a)," and inserting "164(a)".

(8) Section 999(c)(1) is amended by striking "941(a)(5),".

(c) EFFECTIVE DATE. --The amendments made by this section shall apply to transactions after December 31, 2004.

(d) TRANSITIONAL RULE FOR 2005 AND 2006. --

(1) IN GENERAL. --In the case of transactions during 2005 or 2006, the amount includible in gross income by reason of the amendments made by this section shall not exceed the applicable percentage of the amount which would have been so included but for this subsection.

(2) APPLICABLE PERCENTAGE. --For purposes of paragraph (1), the applicable percentage shall be as follows:

(A) For 2005, the applicable percentage shall be 20 percent.

(B) For 2006, the applicable percentage shall be 40 percent.

(e) REVOCATION OF ELECTION TO BE TREATED AS DOMESTIC CORPORATION. --If, during the 1-year period beginning on the date of the enactment of this Act, a corporation for which an election is in effect under section 943(e) of the Internal Revenue Code of 1986 revokes such election, no gain or loss shall be recognized with respect to property treated as transferred under clause (ii) of section 943(e)(4)(B) of such Code to the extent such property --

(1) was treated as transferred under clause (i) thereof, or

(2) was acquired during a taxable year to which such election applies and before May 1, 2003, in the ordinary course of its trade or business.

The Secretary of the Treasury (or such Secretary's delegate) may prescribe such regulations as may be necessary to prevent the abuse of the purposes of this subsection.

(f) BINDING CONTRACTS. --The amendments made by this section shall not apply to any transaction in the ordinary course of a trade or business which occurs pursuant to a binding contract --

(1) which is between the taxpayer and a person who is not a related person (as defined in section 943(b)(3) of such Code, as in effect on the day before the date of the enactment of this Act), and

(2) which is in effect on September 17, 2003, and at all times thereafter.

For purposes of this subsection, a binding contract shall include a purchase option, renewal option, or replacement option which is included in such contract and which is enforceable against the seller or lessor.

SEC . 102. DEDUCTION RELATING TO INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES.

(a) IN GENERAL. --Part VI of subchapter B of chapter 1 (relating to itemized deductions for individuals and corporations) is amended by adding at the end the following new section:

" SEC . 199. INCOME ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES.

"(a) ALLOWANCE OF DEDUCTION. --

"(1) IN GENERAL. --There shall be allowed as a deduction an amount equal to 9 percent of the lesser of --

"(A) the qualified production activities income of the taxpayer for the taxable year, or

"(B) taxable income (determined without regard to this section) for the taxable year.

"(2) PHASEIN. --In the case of any taxable year beginning after 2004 and before 2010, paragraph (1) and subsections (d)(1) and (d)(6) shall be applied by substituting for the percentage contained therein the transition percentage determined under the following table:

"For taxable years                                                              The

                                                                         transition

beginning in:                                                        percentage is:

    2005 or 2006  .................................................               3

    2007, 2008, or 2009  ..........................................               6.

"(b) DEDUCTION LIMITED TO WAGES PAID. --

"(1) IN GENERAL. --The amount of the deduction allowable under subsection (a) for any taxable year shall not exceed 50 percent of the W-2 wages of the employer for the taxable year.

"(2) W-2 WAGES. --For purposes of paragraph (1), the term 'W-2 wages' means the sum of the aggregate amounts the taxpayer is required to include on statements under paragraphs (3) and (8) of section 6051(a) with respect to employment of employees of the taxpayer during the calendar year ending during the taxpayer's taxable year.

"(3) ACQUISITIONS AND DISPOSITIONS. --The Secretary shall provide for the application of this subsection in cases where the taxpayer acquires, or disposes of, the major portion of a trade or business or the major portion of a separate unit of a trade or business during the taxable year.

"(c) QUALIFIED PRODUCTION ACTIVITIES INCOME. --For purposes of this section --

"(1) IN GENERAL. --The term 'qualified production activities income' for any taxable year means an amount equal to the excess (if any) of --

"(A) the taxpayer's domestic production gross receipts for such taxable year, over

"(B) the sum of --

"(i) the cost of goods sold that are allocable to such receipts,

"(ii) other deductions, expenses, or losses directly allocable to such receipts, and

"(iii) a ratable portion of other deductions, expenses, and losses that are not directly allocable to such receipts or another class of income.

"(2) ALLOCATION METHOD. --The Secretary shall prescribe rules for the proper allocation of items of income, deduction, expense, and loss for purposes of determining income attributable to domestic production activities.

"(3) SPECIAL RULES FOR DETERMINING COSTS. --

"(A) IN GENERAL. --For purposes of determining costs under clause (i) of paragraph (1)(B), any item or service brought into the United States shall be treated as acquired by purchase, and its cost shall be treated as not less than its value immediately after it entered the United States. A similar rule shall apply in determining the adjusted basis of leased or rented property where the lease or rental gives rise to domestic production gross receipts.

"(B) EXPORTS FOR FURTHER MANUFACTURE. --In the case of any property described in subparagraph (A) that had been exported by the taxpayer for further manufacture, the increase in cost or adjusted basis under subparagraph (A) shall not exceed the difference between the value of the property when exported and the value of the property when brought back into the United States after the further manufacture.

"(4) DOMESTIC PRODUCTION GROSS RECEIPTS. --

"(A) IN GENERAL. --The term 'domestic production gross receipts' means the gross receipts of the taxpayer which are derived from --

"(i) any lease, rental, license, sale, exchange, or other disposition of --

"(I) qualifying production property which was manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States,

"(II) any qualified film produced by the taxpayer, or

"( III ) electricity, natural gas, or potable water produced by the taxpayer in the United States,

"(ii) construction performed in the United States, or

"(iii) engineering or architectural services performed in the United States for construction projects in the United States.

"(B) EXCEPTIONS. --Such term shall not include gross receipts of the taxpayer which are derived from --

"(i) the sale of food and beverages prepared by the taxpayer at a retail establishment, and

"(ii) the transmission or distribution of electricity, natural gas, or potable water.

"(5) QUALIFYING PRODUCTION PROPERTY. --The term 'qualifying production property' means --

"(A) tangible personal property,

"(B) any computer software, and

"(C) any property described in section 168(f)(4).

"(6) QUALIFIED FILM . --The term 'qualified film' means any property described in section 168(f)(3) if not less than 50 percent of the total compensation relating to the production of such property is compensation for services performed in the United States by actors, production personnel, directors, and producers. Such term does not include property with respect to which records are required to be maintained under section 2257 of title 18, United States Code.

"(7) RELATED PERSONS. --

"(A) IN GENERAL. --The term 'domestic production gross receipts' shall not include any gross receipts of the taxpayer derived from property leased, licensed, or rented by the taxpayer for use by any related person.

"(B) RELATED PERSON. --For purposes of subparagraph (A), a person shall be treated as related to another person if such persons are treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414, except that determinations under subsections (a) and (b) of section 52 shall be made without regard to section 1563(b).

"(d) DEFINITIONS AND SPECIAL RULES. --

"(1) APPLICATION OF SECTION TO PASS-THRU ENTITIES. --

"(A) IN GENERAL. --In the case of an S corporation, partnership, estate or trust, or other pass-thru entity --

"(i) subject to the provisions of paragraphs (2) and (3), this section shall be applied at the shareholder, partner, or similar level, and

"(ii) the Secretary shall prescribe rules for the application of this section, including rules relating to --

"(I) restrictions on the allocation of the deduction to taxpayers at the partner or similar level, and

"(II) additional reporting requirements.

"(B) APPLICATION OF WAGE LIMITATION. --Notwithstanding subparagraph (A)(i), for purposes of applying subsection (b), a shareholder, partner, or similar person which is allocated qualified production activities income from an S corporation, partnership, estate, trust, or other passthru entity shall also be treated as having been allocated W-2 wages from such entity in an amount equal to the lesser of --

"(i) such person's allocable share of such wages (without regard to this subparagraph), as determined under regulations prescribed by the Secretary, or

"(ii) 2 times 9 percent of the qualified production activities income allocated to such person for the taxable year.

"(2) APPLICATION TO INDIVIDUALS. --In the case of an individual, subsection (a)(1)(B) shall be applied by substituting 'adjusted gross income' for 'taxable income'. For purposes of the preceding sentence, adjusted gross income shall be determined --

"(A) after application of sections 86, 135, 137, 219, 221, 222, and 469, and

"(B) without regard to this section.

"(3) PATRONS OF AGRICULTURAL AND HORTICULTURAL COOPERATIVES. --

"(A) IN GENERAL. --If any amount described in paragraph (1) or (3) of section 1385(a) --

"(i) is received by a person from an organization to which part I of subchapter T applies which is engaged --

"(I) in the manufacturing, production, growth, or extraction in whole or significant part of any agricultural or horticultural product, or

"(II) in the marketing of agricultural or horticultural products, and

"(ii) is allocable to the portion of the qualified production activities income of the organization which, but for this paragraph, would be deductible under subsection (a) by the organization and is designated as such by the organization in a written notice mailed to its patrons during the payment period described in section 1382(d),

then such person shall be allowed a deduction under subsection (a) with respect to such amount. The taxable income of the organization shall not be reduced under section 1382 by reason of any amount to which the preceding sentence applies.

"(B) SPECIAL RULES. --For purposes of applying subparagraph (A), in determining the qualified production activities income which would be deductible by the organization under subsection (a) --

"(i) there shall not be taken into account in computing the organization's taxable income any deduction allowable under subsection (b) or (c) of section 1382 (relating to patronage dividends, per-unit retain allocations, and nonpatronage distributions), and

"(ii) in the case of an organization described in subparagraph (A)(i)(II), the organization shall be treated as having manufactured, produced, grown, or extracted in whole or significant part any qualifying production property marketed by the organization which its patrons have so manufactured, produced, grown, or extracted.

"(4) SPECIAL RULE FOR AFFILIATED GROUPS. --

"(A) IN GENERAL. --All members of an expanded affiliated group shall be treated as a single corporation for purposes of this section.

"(B) EXPANDED AFFILIATED GROUP. --For purposes of this section, the term 'expanded affiliated group' means an affiliated group as defined in section 1504(a), determined --

"(i) by substituting '50 percent' for '80 percent' each place it appears, and

"(ii) without regard to paragraphs (2) and (4) of section 1504(b).

"(C) ALLOCATION OF DEDUCTION. --Except as provided in regulations, the deduction under subsection (a) shall be allocated among the members of the expanded affiliated group in proportion to each member's respective amount (if any) of qualified production activities income.

"(5) TRADE OR BUSINESS REQUIREMENT. --This section shall be applied by only taking into account items which are attributable to the actual conduct of a trade or business.

"(6) COORDINATION WITH MINIMUM TAX. --The deduction under this section shall be allowed for purposes of the tax imposed by section 55; except that for purposes of section 55, the deduction under subsection (a) shall be 9 percent of the lesser of --

"(A) qualified production activities income (determined without regard to part IV of subchapter A), or

"(B) alternative minimum taxable income (determined without regard to this section) for the taxable year.

In the case of an individual, subparagraph (B) shall be applied by substituting 'adjusted gross income' for 'alternative minimum taxable income'. For purposes of the preceding sentence, adjusted gross income shall be determined in the same manner as provided in paragraph (2).

"(7) REGULATIONS. --The Secretary shall prescribe such regulations as are necessary to carry out the purposes of this section.".

(b) MINIMUM TAX. --Section 56(g)(4)(C) (relating to disallowance of items not deductible in computing earnings and profits) is amended by adding at the end the following new clause:

"(v) DEDUCTION FOR DOMESTIC PRODUCTION. --Clause (i) shall not apply to any amount allowable as a deduction under section 199.".

(c) SPECIAL RULE RELATING TO ELECTION TO TREAT CUTTING OF TIMBER AS A SALE OR EXCHANGE. --Any election under section 631(a) of the Internal Revenue Code of 1986 made for a taxable year ending on or before the date of the enactment of this Act may be revoked by the taxpayer for any taxable year ending after such date. For purposes of determining whether such taxpayer may make a further election under such section, such election (and any revocation under this section) shall not be taken into account.

(d) TECHNICAL AMENDMENTS. --

(1) Sections 86(b)(2)(A), 135(c)(4)(A), 137(b)(3)(A), and 219(g)(3)(A)(ii) are each amended by inserting "199," before "221".

(2) Clause (i) of section 221(b)(2)(C) is amended by inserting by inserting "199," before "222".

(3) Clause (i) of section 222(b)(2)(C) is amended by inserting "199," before "911".

(4) Paragraph (1) of section 246(b) is amended by inserting "199," after "172,".

(5) Clause (iii) of section 469(i)(3)(F) is amended by inserting "199," before "219,".

(6) Subsection (a) of section 613 is amended by inserting "and without the deduction under section 199" after "without allowances for depletion".

(7) Subsection (a) of section 1402 is amended by striking "and" at the end of paragraph (14), by striking the period at the end of paragraph (15) and inserting ", and", and by inserting after paragraph (15) the following new paragraph:

"(16) the deduction provided by section 199 shall not be allowed.".

(8) The table of sections for part VI of subchapter B of chapter 1 is amended by adding at the end the following new item:

"Sec. 199. Income attributable to domestic production activities.".

(e) EFFECTIVE DATE. --The amendments made by this section shall apply to taxable years beginning after December 31, 2004 .

TITLE II --BUSINESS TAX INCENTIVES

Subtitle A --Small Business Expensing

SEC . 201. 2-YEAR EXTENSION OF INCREASED EXPENSING FOR SMALL BUSINESS.

Subsections (b), (c), and (d) of section 179 are each amended by striking "2006" each place it appears and inserting "2008".

Subtitle B --Depreciation

SEC . 211. RECOVERY PERIOD FOR DEPRECIATION OF CERTAIN LEASEHOLD IMPROVEMENTS AND RESTAURANT PROPERTY.

(a) 15-YEAR RECOVERY PERIOD. --Subparagraph (E) of section 168(e)(3) (relating to classification of certain property) is amended by striking "and" at the end of clause (ii), by striking the period at the end of clause (iii) and inserting a comma, and by adding at the end the following new clauses:

"(iv) any qualified leasehold improvement property placed in service before January 1, 2006 , and

"(v) any qualified restaurant property placed in service before January 1, 2006 .".

(b) QUALIFIED LEASEHOLD IMPROVEMENT PROPERTY. --Subsection (e) of section 168 is amended by adding at the end the following new paragraph:

"(6) QUALIFIED LEASEHOLD IMPROVEMENT PROPERTY. --The term 'qualified leasehold improvement property' has the meaning given such term in section 168(k)(3) except that the following special rules shall apply:

"(A) IMPROVEMENTS MADE BY LESSOR. --In the case of an improvement made by the person who was the lessor of such improvement when such improvement was placed in service, such improvement shall be qualified leasehold improvement property (if at all) only so long as such improvement is held by such person.

"(B) EXCEPTION FOR CHANGES IN FORM OF BUSINESS. --Property shall not cease to be qualified leasehold improvement property under subparagraph (A) by reason of --

"(i) death,

"(ii) a transaction to which section 381(a) applies,

"(iii) a mere change in the form of conducting the trade or business so long as the property is retained in such trade or business as qualified leasehold improvement property and the taxpayer retains a substantial interest in such trade or business,

"(iv) the acquisition of such property in an exchange described in section 1031, 1033, or 1038 to the extent that the basis of such property includes an amount representing the adjusted basis of other property owned by the taxpayer or a related person, or

"(v) the acquisition of such property by the taxpayer in a transaction described in section 332, 351, 361, 721, or 731 (or the acquisition of such property by the taxpayer from the transferee or acquiring corporation in a transaction described in such section), to the extent that the basis of the property in the hands of the taxpayer is determined by reference to its basis in the hands of the transferor or distributor.".

(c) QUALIFIED RESTAURANT PROPERTY. --Subsection (e) of section 168 (as amended by subsection (b)) is further amended by adding at the end the following new paragraph:

"(7) QUALIFIED RESTAURANT PROPERTY. --The term 'qualified restaurant property' means any section 1250 property which is an improvement to a building if --

"(A) such improvement is placed in service more than 3 years after the date such building was first placed in service, and

"(B) more than 50 percent of the building's square footage is devoted to preparation of, and seating for onpremises consumption of, prepared meals.".

(d) REQUIREMENT TO USE STRAIGHT LINE METHOD. --

(1) Paragraph (3) of section 168(b) is amended by adding at the end the following new subparagraphs:

"(G) Qualified leasehold improvement property described in subsection (e)(6).

"(H) Qualified restaurant property described in subsection (e)(7).".

(2) Subparagraph (A) of section 168(b)(2) is amended by inserting before the comma "not referred to in paragraph (3)".

(e) ALTERNATIVE SYSTEM. --The table contained in section 168(g)(3)(B) is amended by adding at the end the following new items:

        "(E)(iv)  .................................................39

        "(E)(v)  ..................................................39".

(f) EFFECTIVE DATE. --The amendments made by this section shall apply to property placed in service after the date of the enactment of this Act.

Subtitle C --Community Revitalization

SEC . 221. MODIFICATION OF TARGETED AREAS AND LOW -INCOME COMMUNITIES FOR NEW MARKETS TAX CREDIT.

(a) TARGETED AREAS. --Paragraph (2) of section 45D(e) (relating to targeted areas) is amended to read as follows:

"(2) TARGETED POPULATIONS. --The Secretary shall prescribe regulations under which 1 or more targeted populations (within the meaning of section 103(20) of the Riegle Community Development and Regulatory Improvement Act of 1994 (12 U.S.C. 4702(20))) may be treated as low-income communities. Such regulations shall include procedures for determining which entities are qualified active low-income community businesses with respect to such populations.".

(b) TRACTS WITH LOW POPULATION. --Subsection (e) of section 45D (defining low-income community) is amended by adding at the end the following:

"(4) TRACTS WITH LOW POPULATION. --A population census tract with a population of less than 2,000 shall be treated as a low-income community for purposes of this section if such tract --

"(A) is within an empowerment zone the designation of which is in effect under section 1391, and

"(B) is contiguous to 1 or more low-income communities (determined without regard to this paragraph).".

(c) EFFECTIVE DATES. --

(1) TARGETED AREAS. --The amendment made by subsection (a) shall apply to designations made by the Secretary of the Treasury after the date of the enactment of this Act.

(2) TRACTS WITH LOW POPULATION. --The amendment made by subsection (b) shall apply to investments made after the date of the enactment of this Act.

SEC . 222. EXPANSION OF DESIGNATED RENEWAL COMMUNITY AREA BASED ON 2000 CENSUS DATA .

(a) IN GENERAL. --Section 1400E (relating to designation of renewal communities) is amended by adding at the end the following new subsection:

"(g) EXPANSION OF DESIGNATED AREA BASED ON 2000 CENSUS. --

"(1) IN GENERAL. --At the request of all governments which nominated an area as a renewal community, the Secretary of Housing and Urban Development may expand the area of such community to include any census tract if --

"(A)(i) at the time such community was nominated, such community would have met the requirements of this section using 1990 census data even if such tract had been included in such community, and

"(ii) such tract has a poverty rate using 2000 census data which exceeds the poverty rate for such tract using 1990 census data, or

"(B)(i) such community would be described in subparagraph (A)(i) but for the failure to meet one or more of the requirements of paragraphs (2)(C)(i), (3)(C), and (3)(D) of subsection (c) using 1990 census data,

"(ii) such community, including such tract, has a population of not more than 200,000 using either 1990 census data or 2000 census data,

"(iii) such tract meets the requirement of subsection (c)(3)(C) using 2000 census data, and

"(iv) such tract meets the requirement of subparagraph (A)(ii).

"(2) EXCEPTION FOR CERTAIN CENSUS TRACTS WITH LOW POPULATION IN 1990. --In the case of any census tract which did not have a poverty rate determined by the Bureau of the Census using 1990 census data, paragraph (1)(B) shall be applied without regard to clause (iv) thereof.

"(3) SPECIAL RULE FOR CERTAIN CENSUS TRACTS WITH LOW POPULATION IN 2000. --At the request of all governments which nominated an area as a renewal community, the Secretary of Housing and Urban Development may expand the area of such community to include any census tract if --

"(A) either --

"(i) such tract has no population using 2000 census data, or

"(ii) no poverty rate for such tract is determined by the Bureau of the Census using 2000 census data,

"(B) such tract is one of general distress, and

"(C) such community, including such tract, meets the requirements of subparagraphs (A) and (B) of subsection (c)(2).

"(4) PERIOD IN EFFECT. --Any expansion under this subsection shall take effect as provided in subsection (b).".

(b) EFFECTIVE DATE. --The amendment made by subsection (a) shall take effect as if included in the amendments made by section 101 of the Community Renewal Tax Relief Act of 2000.

SEC . 223. MODIFICATION OF INCOME REQUIREMENT FOR CENSUS TRACTS WITHIN HIGH MIGRATION RURAL COUNTIES.

(a) IN GENERAL. --Section 45D(e) (relating to low-income community), as amended by this Act, is amended by inserting after paragraph (4) the following new paragraph:

"(5) MODIFICATION OF INCOME REQUIREMENT FOR CENSUS TRACTS WITHIN HIGH MIGRATION RURAL COUNTIES. --

"(A) IN GENERAL. --In the case of a population census tract located within a high migration rural county, paragraph (1)(B)(i) shall be applied by substituting '85 percent' for '80 percent'.

"(B) HIGH MIGRATION RURAL COUNTY. --For purposes of this paragraph, the term 'high migration rural county' means any county which, during the 20-year period ending with the year in which the most recent census was conducted, has a net out-migration of inhabitants from the county of at least 10 percent of the population of the county at the beginning of such period.".

(b) EFFECTIVE DATE. --The amendment made by this section shall take effect as if included in the amendment made by section 121(a) of the Community Renewal Tax Relief Act of 2000.

Subtitle D --S Corporation Reform and Simplification

SEC . 231. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

(a) IN GENERAL. --Paragraph (1) of section 1361(c) (relating to special rules for applying subsection (b)) is amended to read as follows:

"(1) MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER. --

"(A) IN GENERAL. --For purpose of subsection (b)(1)(A) --

"(i) except as provided in clause (ii), a husband and wife (and their estates) shall be treated as 1 shareholder, and

"(ii) in the case of a family with respect to which an election is in effect under subparagraph (D), all members of the family shall be treated as 1 shareholder.

"(B) MEMBERS OF THE FAMILY. --For purpose of subparagraph (A)(ii) --

"(i) IN GENERAL. --The term 'members of the family' means the common ancestor, lineal descendants of the common ancestor, and the spouses (or former spouses) of such lineal descendants or common ancestor.

"(ii) COMMON ANCESTOR --For purposes of this paragraph, an individual shall not be considered a common ancestor if, as of the later of the effective date of this paragraph or the time the election under section 1362(a) is made, the individual is more than 6 generations removed from the youngest generation of shareholders who would (but for this clause) be members of the family. For purposes of the preceding sentence, a spouse (or former spouse) shall be treated as being of the same generation as the individual to which such spouse is (or was) married.

"(C) EFFECT OF ADOPTION, ETC . --In determining whether any relationship specified in subparagraph (B) exists, the rules of section 152(b)(2) shall apply.

"(D) ELECTION. --An election under subparagraph (A)(ii) --

"(i) may, except as otherwise provided in regulations prescribed by the Secretary, be made by any member of the family, and

"(ii) shall remain in effect until terminated as provided in regulations prescribed by the Secretary.".

(b) RELIEF FROM INADVERTENT INVALID ELECTION OR TERMINATION. --Section 1362(f) (relating to inadvertent invalid elections or terminations), as amended by this Act, is amended --

(1) by inserting "or section 1361(c)(1)(A)(ii)" after "section 1361(b)(3)(B)(ii)," in paragraph (1), and

(2) by inserting "or section 1361(c)(1)(D)(iii)" after "section 1361(b)(3)(C)," in paragraph (1)(B).

(c) EFFECTIVE DATES. --

(1) SUBSECTION (a). --The amendment made by subsection (a) shall apply to taxable years beginning after December 31, 2004 .

(2) SUBSECTION (b). --The amendments made by subsection (b) shall apply to elections and terminations made after December 31, 2004 .

SEC . 232. INCREASE IN NUMBER OF ELIGIBLE SHAREHOLDERS TO 100.

(a) IN GENERAL. --Section 1361(b)(1)(A) (defining small business corporation) is amended by striking "75" and inserting "100".

(b) EFFECTIVE DATE. --The amendment made by this section shall apply to taxable years beginning after December 31, 2004 .

SEC . 233. EXPANSION OF BANK S CORPORATION ELIGIBLE SHAREHOLDERS TO INCLUDE IRAS.

(a) IN GENERAL. --Section 1361(c)(2)(A) (relating to certain trusts permitted as shareholders) is amended by inserting after clause (v) the following new clause:

"(vi) In the case of a corporation which is a bank (as defined in section 581), a trust which constitutes an individual retirement account under section 408(a), including one designated as a Roth IRA under section 408A, but only to the extent of the stock held by such trust in such bank as of the date of the enactment of this clause.".

(b) TREATMENT AS SHAREHOLDER. --Section 1361(c)(2)(B) (relating to treatment as shareholders) is amended by adding at the end the following new clause:

"(vi) In the case of a trust described in clause (vi) of subparagraph (A), the individual for whose benefit the trust was created shall be treated as a shareholder.".

(c) SALE OF BANK STOCK IN IRA RELATING TO S CORPORATION ELECTION EXEMPT FROM PROHIBITED TRANSACTION RULES. --Section 4975(d) (relating to exemptions) is amended by striking "or" at the end of paragraph (14), by striking the period at the end of paragraph (15) and inserting "; or", and by adding at the end the following new paragraph:

"(16) a sale of stock held by a trust which constitutes an individual retirement account under section 408(a) to the individual for whose benefit such account is established if --

"(A) such stock is in a bank (as defined in section 581),

"(B) such stock is held by such trust as of the date of the enactment of this paragraph,

"(C) such sale is pursuant to an election under section 1362(a) by such bank,

"(D) such sale is for fair market value at the time of sale (as established by an independent appraiser) and the terms of the sale are otherwise at least as favorable to such trust as the terms that would apply on a sale to an unrelated party,

"(E) such trust does not pay any commissions, costs, or other expenses in connection with the sale, and

"(F) the stock is sold in a single transaction for cash not later than 120 days after the S corporation election is made.".

(d) CONFORMING AMENDMENT. --Section 512(e)(1) is amended by inserting "1361(c)(2)(A)(vi) or" before "1361(c)(6)".

(e) EFFECTIVE DATE. --The amendments made by this section shall take effect on the date of the enactment of this Act.

SEC . 234. DISREGARD OF UNEXERCISED POWERS OF APPOINTMENT IN DETERMINING POTENTIAL CURRENT BENEFICIARIES OF ESBT.

(a) IN GENERAL. --Section 1361(e)(2) (defining potential current beneficiary) is amended --

(1) by inserting "(determined without regard to any power of appointment to the extent such power remains unexercised at the end of such period)" after "of the trust" in the first sentence, and

(2) by striking "60-day" in the second sentence and inserting "1-year".

(b) EFFECTIVE DATE. --The amendments made by this section shall apply to taxable years beginning after December 31, 2004 .

SEC . 235. TRANSFER OF SUSPENDED LOSSES INCIDENT TO DIVORCE, ETC .

(a) IN GENERAL. --Section 1366(d)(2) (relating to indefinite carryover of disallowed losses and deductions) is amended to read as follows:

"(2) INDEFINITE CARRYOVER OF DISALLOWED LOSSES AND DEDUCTIONS. --

"(A) IN GENERAL. --Except as provided in subparagraph (B), any loss or deduction which is disallowed for any taxable year by reason of paragraph (1) shall be treated as incurred by the corporation in the succeeding taxable year with respect to that shareholder.

"(B) TRANSFERS OF STOCK BETWEEN SPOUSES OR INCIDENT TO DIVORCE. --In the case of any transfer described in section 1041(a) of stock of an S corporation, any loss or deduction described in subparagraph (A) with respect such stock shall be treated as incurred by the corporation in the succeeding taxable year with respect to the transferee.".

(b) EFFECTIVE DATE. --The amendment made by this section shall apply to taxable years beginning after December 31, 2004 .

SEC . 236. USE OF PASSIVE ACTIVITY LOSS AND AT-RISK AMOUNTS BY QUALIFIED SUBCHAPTER S TRUST INCOME BENEFICIARIES.

(a) IN GENERAL. --Section 1361(d)(1) (relating to special rule for qualified subchapter S trust) is amended --

(1) by striking "and" at the end of subparagraph (A),

(2) by striking the period at the end of subparagraph (B) and inserting ", and", and

(3) by adding at the end the following new subparagraph:

"(C) for purposes of applying sections 465 and 469 to the beneficiary of the trust, the disposition of the S corporation stock by the trust shall be treated as a disposition by such beneficiary.".

(b) EFFECTIVE DATE. --The amendments made by this section shall apply to transfers made after December 31, 2004 .

SEC . 237. EXCLUSION OF INVESTMENT SECURITIES INCOME FROM PASSIVE INCOME TEST FOR BANK S CORPORATIONS.

(a) IN GENERAL. --Section 1362(d)(3) (relating to where passive investment income exceeds 25 percent of gross receipts for 3 consecutive taxable years and corporation has accumulated earnings and profits) is amended by adding at the end the following new subparagraph:

"(F) EXCEPTION FOR BANKS; ETC . --In the case of a bank (as defined in section 581), a bank holding company (within the meaning of section 2(a) of the Bank Holding Company Act of 1956 (12 U.S.C. 1841(a))), or a financial holding company (within the meaning of section 2(p) of such Act), the term 'passive investment income' shall not include --

"(i) interest income earned by such bank or company, or

"(ii) dividends on assets required to be held by such bank or company, including stock in the Federal Reserve Bank, the Federal Home Loan Bank, or the Federal Agricultural Mortgage Bank or participation certificates issued by a Federal Intermediate Credit Bank.".

(b) EFFECTIVE DATE. --The amendment made by this section shall apply to taxable years beginning after December 31, 2004 .

SEC . 238. RELIEF FROM INADVERTENTLY INVALID QUALIFIED SUBCHAPTER S SUBSIDIARY ELECTIONS AND TERMINATIONS.

(a) IN GENERAL. --Section 1362(f) (relating to inadvertent invalid elections or terminations) is amended --

(1) by inserting ", section 1361(b)(3)(B)(ii)," after "subsection (a)" in paragraph (1),

(2) by inserting ", section 1361(b)(3)(C)," after "subsection (d)" in paragraph (1)(B),

(3) by amending paragraph (3)(A) to read as follows:

"(A) so that the corporation for which the election was made or the termination occurred is a small business corporation or a qualified subchapter S subsidiary, as the case may be, or",

(4) by amending paragraph (4) to read as follows:

"(4) the corporation for which the election was made or the termination occurred, and each person who was a shareholder in such corporation at any time during the period specified pursuant to this subsection, agrees to make such adjustments (consistent with the treatment of such corporation as an S corporation or a qualified subchapter S subsidiary, as the case may be) as may be required by the Secretary with respect to such period,", and

(5) by inserting "or a qualified subchapter S subsidiary, as the case may be" after "S corporation" in the matter following paragraph (4).

(b) EFFECTIVE DATE. --The amendments made by this section shall apply to elections made and terminations made after December 31, 2004 .

SEC . 239. INFORMATION RETURNS FOR QUALIFIED SUBCHAPTER S SUBSIDIARIES.

(a) IN GENERAL. --Section 1361(b)(3)(A) (relating to treatment of certain wholly owned subsidiaries) is amended by inserting "and in the case of information returns required under part III of subchapter A of chapter 61" after "Secretary".

(b) EFFECTIVE DATE. --The amendment made by this section shall apply to taxable years beginning after December 31, 2004 .

SEC . 240. REPAYMENT OF LOANS FOR QUALIFYING EMPLOYER SECURITIES.

(a) IN GENERAL. --Subsection (f) of section 4975 (relating to other definitions and special rules) is amended by adding at the end the following new paragraph:

"(7) S CORPORATION REPAYMENT OF LOANS FOR QUALIFYING EMPLOYER SECURITIES. --A plan shall not be treated as violating the requirements of section 401 or 409 or subsection (e)(7), or as engaging in a prohibited transaction for purposes of subsection (d)(3), merely by reason of any distribution (as described in section 1368(a)) with respect to S corporation stock that constitutes qualifying employer securities, which in accordance with the plan provisions is used to make payments on a loan described in subsection (d)(3) the proceeds of which were used to acquire such qualifying employer securities (whether or not allocated to participants). The preceding sentence shall not apply in the case of a distribution which is paid with respect to any employer security which is allocated to a participant unless the plan provides that employer securities with a fair market value of not less than the amount of such distribution are allocated to such participant for the year which (but for the preceding sentence) such distribution would have been allocated to such participant.".

(b) EFFECTIVE DATE. --The amendment made by this section shall apply to distributions with respect to S corporation stock made after December 31, 1997 .

Subtitle E --Other Business Incentives

SEC . 241. PHASEOUT OF 4.3- CENT MOTOR FUEL EXCISE TAXES ON RAILROADS AND INLAND WATERWAY TRANSPORTATION WHICH REMAIN IN GENERAL FUND.

(a) TAXES ON TRAINS. --

(1) IN GENERAL. --Clause (ii) of section 4041(a)(1)(C) is amended by striking subclauses (I), (II), and ( III ) and inserting the following new subclauses:

"(I) 3.3 cents per gallon after December 31, 2004 , and before July 1, 2005 ,

"(II) 2.3 cents per gallon after June 30, 2005 , and before January 1, 2007 , and

"( III ) 0 after December 31, 2006 .".

(2) CONFORMING AMENDMENTS. --

(A) Subsection (d) of section 4041 is amended by redesignating paragraph (3) as paragraph (4) and by inserting after paragraph (2) the following new paragraph:

"(3) DIESEL FUEL USED IN TRAINS. --In the case of any sale for use or use after December 31, 2006 , there is hereby imposed a tax of 0.1 cent per gallon on any liquid other than gasoline (as defined in section 4083) --

"(A) sold by any person to an owner, lessee, or other operator of a diesel-powered train for use as a fuel in such train, or

"(B) used by any person as a fuel in a diesel-powered train unless there was a taxable sale of such fuel under subparagraph (A).

No tax shall be imposed by this paragraph on the sale or use of any liquid if tax was imposed on such liquid under section 4081.".

(B) Subsection (f) of section 4082 is amended by striking "section 4041(a)(1)" and inserting "subsections (a)(1) and (d)(3) of section 4041".

(C) Subparagraph (B) of section 6421(f)(3) is amended to read as follows:

"(B) so much of the rate specified in section 4081(a)(2)(A) as does not exceed the rate applicable under section 4041(a)(1)(C)(ii).".

(D) Subparagraph (B) of section 6427(l)(3) is amended to read as follows:

"(B) so much of the rate specified in section 4081(a)(2)(A) as does not exceed the rate applicable under section 4041(a)(1)(C)(ii).".

(b) FUEL USED ON INLAND WATERWAYS. --Subparagraph (C) of section 4042(b)(2) is amended to read as follows:

"(C) The deficit reduction rate is --

"(i) 3.3 cents per gallon after December 31, 2004 , and before July 1, 2005 ,

"(ii) 2.3 cents per gallon after June 30, 2005 , and before January 1, 2007 , and

"(iii) 0 after December 31, 2006 .".

(c) EFFECTIVE DATE. --The amendments made by this section shall take effect on January 1, 2005 .

SEC . 242. MODIFICATION OF APPLICATION OF INCOME FORECAST METHOD OF DEPRECIATION.

(a) IN GENERAL. --Section 167(g) (relating to depreciation under income forecast method) is amended by adding at the end the following new paragraph:

"(7) TREATMENT OF PARTICIPATIONS AND RESIDUALS. --

"(A) IN GENERAL. --For purposes of determining the depreciation deduction allowable with respect to a property under this subsection, the taxpayer may include participations and residuals with respect to such property in the adjusted basis of such property for the taxable year in which the property is placed in service, but only to the extent that such participations and residuals relate to income estimated (for purposes of this subsection) to be earned in connection with the property before the close of the 10th taxable year referred to in paragraph (1)(A).

"(B) PARTICIPATIONS AND RESIDUALS. --For purposes of this paragraph, the term 'participations and residuals' means, with respect to any property, costs the amount of which by contract varies with the amount of income earned in connection with such property.

"(C) SPECIAL RULES RELATING TO RECOMPUTATION YEARS. --If the adjusted basis of any property is determined under this paragraph, paragraph (4) shall be applied by substituting 'for each taxable year in such period' for 'for such period'.

"(D) OTHER SPECIAL RULES. --

"(i) PARTICIPATIONS AND RESIDUALS. --Notwithstanding subparagraph (A), the taxpayer may exclude participations and residuals from the adjusted basis of such property and deduct such participations and residuals in the taxable year that such participations and residuals are paid.

"(ii) COORDINATION WITH OTHER RULES. --Deductions computed in accordance with this paragraph shall be allowable notwithstanding paragraph (1)(B), section 263, 263A, 404, 419, or 461(h).

"(E) AUTHORITY TO MAKE ADJUSTMENTS. --The Secretary shall prescribe appropriate adjustments to the basis of property and to the look-back method for the additional amounts allowable as a deduction solely by reason of this paragraph.".

(b) DETERMINATION OF INCOME. --Section 167(g)(5) (relating to special rules) is amended by redesignating subparagraphs (E) and (F) as subparagraphs (F) and (G), respectively, and inserting after subparagraph (D) the following new subparagraph:

"(E) TREATMENT OF DISTRIBUTION COSTS. --For purposes of this subsection, the income with respect to any property shall be the taxpayer's gross income from such property.".

(c) EFFECTIVE DATE. --The amendments made by this section shall apply to property placed in service after the date of the enactment of this Act.