Sec. 1004. Maximum rate on business income of individuals
2,142 words·~10 min read·
/bill/115/hr/1/eh/section-1004A research copy — for the controlling text, always check the official state or federal source. Not legal advice.
Part I of subchapter A of chapter 1 is amended by inserting after section 3 the following new section: The tax imposed by section 1 shall be reduced by the sum of— 10 percent of the lesser of— qualified business income, or the excess (if any) of— taxable income reduced by net capital gain (as defined in section 1(h)(11)(A)), over the maximum dollar amount for the 25-percent rate bracket which applies to the taxpayer under section 1 for the taxable year, and 4.6 percent of the excess (if any) of— the lesser of— qualified business income, or the excess (if any) determined under paragraph (1)(B), over the excess of— the maximum dollar amount for the 35-percent rate bracket which applies to the taxpayer under section 1 for the taxable year, over the maximum dollar amount for the 25-percent rate bracket which applies to the taxpayer under section 1 for the taxable year.
For purposes of this section, the term qualified business income means the excess (if any) of— the sum of— 100 percent of any net business income derived from any passive business activity, plus the capital percentage of any net business income derived from any active business activity, over the sum of— 100 percent of any net business loss derived from any passive business activity, except as provided in subsection (e)(3)(A), 30 percent of any net business loss derived from any active business activity, plus any carryover business loss determined for the preceding taxable year.
For purposes of this section— Net business income or loss shall be determined with respect to any business activity by appropriately netting items of income, gain, deduction, and loss with respect to such business activity. Any wages (as defined in section 3401), payments described in subsection
(a)or
(c)of section 707, or directors’ fees received by the taxpayer which are properly attributable to any business activity shall be taken into account under paragraph
(1)as an item of income with respect to such business activity. There shall not be taken into account under paragraph (1)— any item of short-term capital gain, short-term capital loss, long-term capital gain, or long-term capital loss, any dividend, income equivalent to a dividend, or payment in lieu of dividends described in section 954(c)(1)(G), any interest income other than interest income which is properly allocable to a trade or business, any item of gain or loss described in subparagraph
(C)or
(D)of section 954(c)(1) (applied by substituting business activity for controlled foreign corporation ), any item of income, gain, deduction, or loss taken into account under section 954(c)(1)(F) (determined without regard to clause
(ii)thereof and other than items attributable to notional principal contracts entered into in transactions qualifying under section 1221(a)(7)), any amount received from an annuity which is not received in connection with the trade or business of the business activity, and any item of deduction or loss properly allocable to an amount described in any of the preceding subparagraphs. Net business income or loss shall be appropriately adjusted so as only to take into account any amount of income, gain, deduction, or loss to the extent such amount affects the determination of taxable income for the taxable year. For purposes of subsection (b)(2)(C), the carryover business loss determined for any taxable year is the excess (if any) of the sum described in subsection (b)(2) over the sum described in subsection (b)(1) for such taxable year. For purposes of this section— The term passive business activity means any passive activity as defined in section 469(c) determined without regard to paragraphs
(3)and (6)(B) thereof. The term active business activity means any business activity which is not a passive business activity. The term business activity means any activity (within the meaning of section 469) which involves the conduct of any trade or business. For purposes of this section— Except as otherwise provided in this section, the term capital percentage means 30 percent. In the case of a taxpayer who elects the application of this paragraph with respect to any active business activity (other than a specified service activity), the capital percentage shall be equal to the applicable percentage (as defined in subsection (f)) for each taxable year with respect to which such election applies. Any election made under this paragraph shall apply to the taxable year for which such election is made and each of the 4 subsequent taxable years. Such election shall be made not later than the due date (including extensions) for the return of tax for the taxable year for which such election is made, and, once made, may not be revoked. In the case of any active business activity which is a specified service activity— the capital percentage shall be 0 percent, and subsection (b)(2)(B) shall be applied by substituting 0 percent for 30 percent . If— the taxpayer elects the application of this subparagraph with respect to such activity for any taxable year, and the applicable percentage (as defined in subsection (f)) with respect to such activity for such taxable year is at least 10 percent, then subparagraph
(A)shall not apply and the capital percentage with respect to such activity shall be equal to such applicable percentage. The term specified service activity means any activity involving the performance of services described in section 1202(e)(3)(A), including investing, trading, or dealing in securities (as defined in section 475(c)(2)), partnership interests, or commodities (as defined in section 475(e)(2)). The capital percentage (determined after the application of paragraphs
(2)and (3)) with respect to any active business activity shall not exceed 1 minus the quotient (not greater than 1) of— any amounts described in subsection (c)(2) which are taken into account in determining the net business income derived from such activity, divided by such net business income. For purposes of this section— The term applicable percentage means, with respect to any active business activity for any taxable year, the quotient (not greater than 1) of— the specified return on capital with respect to such activity for such taxable year, divided by the taxpayer’s net business income derived from such activity for such taxable year. The term specified return on capital means, with respect to any active business activity referred to in paragraph (1), the excess of— the product of— the deemed rate of return for the taxable year, multiplied by the asset balance with respect to such activity for such taxable year, over an amount equal to the interest which is paid or accrued, and for which a deduction is allowed under this chapter, with respect to such activity for such taxable year. The term deemed rate of return means, with respect to any taxable year, the Federal short-term rate (determined under section 1274(d) for the month in which or with which such taxable year ends) plus 7 percentage points. The asset balance with respect to any active business activity referred to in paragraph
(1)for any taxable year equals the taxpayer’s adjusted basis of any property described in section 1221(a)(2) which is used in connection with such activity as of the end of the taxable year (determined without regard to sections 168(k) and 179). In the case of any active business activity carried on through a partnership or S corporation, the taxpayer shall take into account such taxpayer’s distributive or pro rata share (as the case may be) of the asset balance with respect to such activity as determined with respect to such partnership or S corporation under subparagraph
(A)(applied by substituting the partnership’s or S corporation’s adjusted basis for the taxpayer’s adjusted basis ). The tax imposed by section 1 shall be reduced by 3 percent of the excess (if any) of— the least of— qualified active business income, taxable income reduced by net capital gain (as defined in section 1(h)(11)(A)), or the 9-percent bracket threshold amount, over the excess (if any) of taxable income over the applicable threshold amount. In the case of any taxable year beginning before January 1, 2022, paragraph
(1)shall be applied by substituting for 3 percent — in the case of any taxable year beginning after December 31, 2017, and before January 1, 2020, 1 percent , and in the case of any taxable year beginning after December 31, 2019, and before January 1, 2022, 2 percent . For purposes of this subsection, the term qualified active business income means the excess (if any) of— any net business income derived from any active business activity, over any net business loss derived from any active business activity. For purposes of this subsection, the term 9-percent bracket threshold amount means— in the case of a joint return or surviving spouse, $75,000, in the case of an individual who is the head of a household (as defined in section 2(b)), 3/4 of the amount in effect for the taxable year under subparagraph (A), and in the case of any other individual, 1/2 of the amount in effect for the taxable year under subparagraph (A). For purposes of this subsection, the term applicable threshold amount means— in the case of a joint return or surviving spouse, $150,000, in the case of an individual who is the head of a household (as defined in section 2(b)), 3/4 of the amount in effect for the taxable year under subparagraph (A), and in the case of any other individual, 1/2 of the amount in effect for the taxable year under subparagraph (A). Paragraph
(1)shall not apply to any estate or trust. In the case of any taxable year beginning after 2018, the dollar amounts in paragraphs (4)(A) and (5)(A) shall each be increased by an amount equal to— such dollar amount, multiplied by the cost-of-living adjustment determined under subsection (c)(2)(A) for the calendar year in which the taxable year begins, determined by substituting calendar year 2017 for calendar year 2016 in clause
(ii)thereof. If any increase determined under the preceding sentence is not a multiple of $100, such increase shall be rounded to the next lowest multiple of $100. The Secretary may issue such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance— which ensures that no amount is taken into account under subsection (f)(4) with respect to more than one activity, and which treats all specified service activities of the taxpayer as a single business activity for purposes of this section to the extent that such activities would be treated as a single employer under subsection
(a)or
(b)of section 52 or subsection
(m)or
(o)of section 414. Any reference in this title to section 1 shall be treated as including a reference to this section unless the context of such reference clearly indicates otherwise. . Section 1(h), as amended by the preceding provisions of this Act, is amended by adding at the end the following new paragraph: For purposes of this subsection, net capital gain (as defined in paragraph (11)) and unrecaptured section 1250 gain (as defined in paragraph (6)) shall each be increased by specified dividend income. For purposes of this paragraph, the term specified dividend income means— in the case of any dividend received from a real estate investment trust, the portion of such dividend which is neither— a capital gain dividend (as defined in section 852(b)(3)), nor taken into account in determining qualified dividend income (as defined in paragraph (11)), and any dividend which is includible in gross income and which is received from an organization or corporation described in section 501(c)(12) or 1381(a). . The table of sections for part I of subchapter A of chapter 1 is amended by inserting after the item relating to section 3 the following new item: Sec. 4. 25 percent maximum rate on business income of individuals. . The amendments made by this section shall apply to taxable years beginning after December 31, 2017. In the case of any taxable year which includes December 31, 2017, the amendment made by subsection
(a)shall apply with respect to such taxable year adjusted— so as to apply with respect to the rates of tax in effect under section 1 of the Internal Revenue Code of 1986 with respect to such taxable year (and so as to achieve a 25 percent effective rate of tax on the business income (determined without regard to paragraph (2)) in the same manner as such amendment applies to taxable years beginning after such date with respect to the rates of tax in effect for such years), and by reducing the amount of the reduction in tax (as otherwise determined under paragraph (1)) by the amount which bears the same proportion to the amount of such reduction as the number of days in the taxable year which are before January 1, 2018, bears to the number of days in the entire taxable year.