Title I — Tax Reform for Individuals

“1. Tax imposed

“(a) In general—There is hereby imposed on the income of every individual a tax equal to the sum of—

“(1) 10 percent bracket—10 percent of so much of the taxable income as does not exceed the 25-percent bracket threshold amount,

“(2) 25 percent bracket—25 percent of so much of the taxable income as exceeds the 25-percent bracket threshold amount, plus

“(3) 35 percent bracket—10 percent of so much of the modified adjusted gross income (as defined in section 2) as exceeds the 35-percent bracket threshold amount.

“(b) Bracket threshold amounts—For purposes of this section—

“(1) 25-percent bracket threshold amount—The term “25-percent bracket threshold amount” means—

“(A) in the case of a joint return or surviving spouse, $71,200,

“(B) in the case of any other individual (other than an estate or trust), one-half of the dollar amount in effect under subparagraph (A), and

“(C) in the case of an estate or trust, zero.

“(2) 35-percent bracket threshold amount—The term “35-percent bracket threshold amount” means—

“(A) in the case of a joint return or surviving spouse, $450,000,

“(B) in the case of any other individual (other than an estate or trust), $400,000, and

“(C) in the case of an estate or trust, $12,000.

“(c) Inflation adjustment

“(1) In general—In the case of any taxable year beginning after 2014, each dollar amount in subsections (b)(1)(A), (b)(2)(A), (b)(2)(B), (b)(2)(C), (e)(3)(A), and (e)(3)(B) shall be increased by an amount equal to—

“(A) such dollar amount, multiplied by

“(B) the cost-of-living adjustment determined under this subsection for the calendar year in which the taxable year begins.

“(2) Cost-of-living adjustment—For purposes of this subsection—

“(A) In general—The cost-of-living adjustment for any calendar year is the percentage (if any) by which—

“(i) the C-CPI-U for the preceding calendar year, exceeds

“(ii) the normalized CPI for calendar year 2012.

“(B) Special rule for adjustments with a base year after 2012—For purposes of any provision which provides for the substitution of a year after 2012 for “2012” in subparagraph (A)(ii), subparagraph (A) shall be applied by substituting “C-CPI-U” for “normalized CPI” in clause (ii).

“(3) Normalized CPI—For purposes of this subsection, the normalized CPI for any calendar year is the product of—

“(A) the CPI for such calendar year, multiplied by

“(B) the C-CPI-U transition multiple.

“(4) C-CPI-U transition multiple—For purposes of this subsection, the term “C-CPI-U transition multiple” means the amount obtained by dividing—

“(A) the C-CPI-U for calendar year 2013, by

“(B) the CPI for calendar year 2013.

“(5) C-CPI-U—For purposes of this subsection—

“(A) In general—The term “C-CPI-U” means the Chained Consumer Price Index for All Urban Consumers (as published by the Bureau of Labor Statistics of the Department of Labor). The values of the Chained Consumer Price Index for All Urban Consumers taken into account for purposes of determining the cost-of-living adjustment for any calendar year under this subsection shall be the latest values so published as of the date on which such Bureau publishes the initial value of the Chained Consumer Price Index for All Urban Consumers for the month of August for the preceding calendar year.

“(B) Determination for calendar year—The C-CPI-U for any calendar year is the average of the C-CPI-U as of the close of the 12-month period ending on August 31 of such calendar year.

“(6) CPI—For purposes of this subsection—

“(A) In general—The term “Consumer Price Index” means the last Consumer Price Index for All Urban Consumers published by the Department of Labor. For purposes of the preceding sentence, the revision of the Consumer Price Index which is most consistent with the Consumer Price Index for calendar year 1986 shall be used.

“(B) Determination for calendar year—The CPI for any calendar year is the average of the Consumer Price Index as of the close of the 12-month period ending on August 31 of such calendar year.

“(d) Special rules for certain children with unearned income

“(1) In general—In the case of any child to whom this subsection applies for any taxable year—

“(A) the 25-percent bracket threshold amount shall not be more than the taxable income of such child for the taxable year reduced by the net unearned income of such child, and

“(B) the 35-percent bracket threshold amount shall not be more than the sum of—

“(i) the taxable income of such child for the taxable year reduced by the net unearned income of such child, plus

“(ii) the dollar amount in effect under subsection (b)(2)(C) for the taxable year.

“(2) Child to whom subsection applies—This subsection shall apply to any child for any taxable year if—

“(A) such child—

“(i) has not attained age 18 before the close of the taxable year, or

“(ii) has attained age 18 before the close of the taxable year and is described in paragraph (3),

“(B) either parent of such child is alive at the close of the taxable year, and

“(C) such child does not file a joint return for the taxable year.

“(3) Certain children whose earned income does not exceed one-half of individual’s support—A child is described in this paragraph if—

“(A) such child—

“(i) has not attained age 19 before the close of the taxable year, or

“(ii) is a student (within the meaning of section 7705(f)(2)) who has not attained age 24 before the close of the taxable year, and

“(B) such child’s earned income (as defined in section 911(d)(2)) for such taxable year does not exceed one-half of the amount of the individual’s support (within the meaning of section 7705(c)(1)(D) after the application of section 7705(f)(5) (without regard to subparagraph (A) thereof)) for such taxable year.

“(4) Net unearned income—For purposes of this subsection—

“(A) In general—The term “net unearned income” means the excess of—

“(i) the portion of the adjusted gross income for the taxable year which is not attributable to earned income (as defined in section 911(d)(2)), over

“(ii) the sum of—

“(I) the amount in effect for the taxable year under section 63(c)(4)(A) (relating to limitation on standard deduction in the case of certain dependents), plus

“(II) the greater of the amount described in subclause (I) or, if the child itemizes his deductions for the taxable year, the amount of the itemized deductions allowed by this chapter for the taxable year which are directly connected with the production of the portion of adjusted gross income referred to in clause (i).

“(B) Limitation based on taxable income—The amount of the net unearned income for any taxable year shall not exceed the individual’s taxable income for such taxable year.

“(e) Phaseout of 10-Percent rate

“(1) In general—The amount of tax imposed by this section (determined without regard to this subsection) shall be increased by 5 percent of the excess (if any) of—

“(A) modified adjusted gross income, over

“(B) the applicable dollar amount.

“(2) Limitation—The increase determined under paragraph (1) with respect to any taxpayer for any taxable year shall not exceed 15 percent of the lesser of—

“(A) the taxpayer’s taxable income for such taxable year, or

“(B) the 25-percent bracket threshold amount in effect with respect to the taxpayer for such taxable year.

“(3) Applicable dollar amount—For purposes of this subsection, the term “applicable dollar amount” means—

“(A) in the case of a joint return or a surviving spouse, $300,000,

“(B) in the case of any other individual, $250,000.

“(4) Estates and trusts—Paragraph (1) shall not apply in the case of an estate or trust.

“(f) Determination of highest rate—For purposes of any provision of law which refers to the highest rate of tax specified in this section (or any subsection of this section), such highest rate shall be treated as being 35 percent.”

“(b) Modified adjusted gross income—For purposes of section 1—

“(1) In general—The term “modified adjusted gross income” means adjusted gross income—

“(A) increased by—

“(i) any amount excluded from gross income under sections 911, 931, and 933,

“(ii) the excess (if any) of—

“(I) amounts of interest received or accrued by the taxpayer during the taxable year which are exempt from tax, over

“(II) amounts disallowed as a deduction by reason of section 163(d)(1)(A) or 171(a)(2),

“(iii) any exclusion from gross income with respect to the cost described in section 6051(a)(14) (without regard to subparagraphs (A) and (B) thereof),

“(iv) any deduction allowable under section 162(l) (relating to special rules for health insurance costs of self-employed individuals),

“(v) any annual addition (as defined in section 415(c)(2)) to a defined contribution plan which is not includible in, or which is deductible from, the gross income of the individual for the taxable year,

“(vi) any deduction allowable under section 223, and

“(vii) the excess (if any) of—

“(I) the social security benefits of the individual for the taxable year (as defined in section 86(d)), over

“(II) the amount included in the gross income of such individual for such taxable year under section 86, and

“(B) decreased by—

“(i) any deduction allowed under section 170 (and in the case of an estate or trust, any deduction allowed under section 642(c)), and

“(ii) qualified domestic manufacturing income.

“(2) Determination of adjusted gross income in case of estates and trusts—For purposes of this subsection, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that—

“(A) the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate, and

“(B) the deductions allowable under sections 642(b), 651, and 661,

“(c) Qualified domestic manufacturing income

“(1) In general—For purposes of subsection (b), the term “qualified domestic manufacturing income” for any taxable year means an amount equal to the excess (if any) of—

“(A) the taxpayer’s domestic manufacturing gross receipts for such taxable year, over

“(B) the sum of—

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

“(ii) other expenses, losses, or deductions, which are properly allocable to such receipts.

“(2) Allocation method—The Secretary shall prescribe rules for the proper allocation of items described in paragraph (1) for purposes of determining qualified domestic manufacturing income. Such rules shall provide for the proper allocation of items whether or not such items are directly allocable to domestic manufacturing gross receipts.

“(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 manufacturing 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 manufacturing gross receipts—For purposes of this subsection—

“(A) In general—The term “domestic manufacturing gross receipts” means the gross receipts of the taxpayer which are derived from—

“(i) any lease, rental, license, sale, exchange, or other disposition of tangible personal property which was manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States, or

“(ii) in the case of a taxpayer engaged in the active conduct of a construction trade or business, construction of real property performed in the United States by the taxpayer in the ordinary course of such trade or business if such real property is placed in service after December 31, 2014.

“(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,

“(ii) the transmission or distribution of electricity, natural gas, or potable water, and

“(iii) the lease, rental, license, sale, exchange, or other disposition of land.

“(C) Special rule for certain government contracts—Gross receipts derived from the manufacture or production of any property described in subparagraph (A)(i) shall be treated as meeting the requirements of subparagraph (A)(i) if—

“(i) such property is manufactured or produced by the taxpayer pursuant to a contract with the Federal Government, and

“(ii) the Federal Acquisition Regulation requires that title or risk of loss with respect to such property be transferred to the Federal Government before the manufacture or production of such property is complete.

“(D) Treatment of activities in Puerto Rico—In the case of any taxpayer with gross receipts for any taxable year from sources within the Commonwealth of Puerto Rico, if all of such receipts are taxable under section 1 for such taxable year, then this paragraph shall be applied by treating each reference in subparagraph (A) to the United States as including the Commonwealth of Puerto Rico.

“(E) Tangible personal property—The term “tangible personal property” shall not include computer software or any property described in paragraph (3) or (4) of section 168(f).

“(F) Related persons

“(i) In general—The term “domestic manufacturing 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.

“(ii) Related person—For purposes of clause (i), 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).

“(5) Certain income not qualified

“(A) Net earnings from self employment—Domestic manufacturing gross receipts shall not include any amount which is properly allocable to the taxpayer’s net earnings from self employment (determined after any reduction provided under section 1402(m)).

“(B) Certain accounting method adjustments—Domestic manufacturing gross receipts shall not include any amount attributable to—

“(i) a qualified change in method of accounting (as defined in section 3301(d)(2) of the Tax Reform Act of 2014), or

“(ii) any other change in method of accounting which is required by the amendments made by such Act.

“(6) Application of section to pass-through entities

“(A) Partnerships and s corporations—Except as provided in subparagraph (B), in the case of a partnership or S corporation, each partner or shareholder shall take into account such person’s allocable share of each item described in subparagraph (A) or (B) of paragraph (1) (determined without regard to whether the items described in such subparagraph (A) exceed the items described in such subparagraph (B)).

“(B) Publicly traded partnerships—In the case of a publicly traded partnership described in section 7704(c), each partner shall not take into account any allocable share of any item referred to in subparagraph (A).

“(C) Trusts and estates—In the case of a trust or estate, the items referred to in subparagraph (A) (as determined therein) shall be apportioned between the beneficiaries and the fiduciary (and among the beneficiaries) under regulations prescribed by the Secretary.

“(7) Regulations—The Secretary shall prescribe such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance—

“(A) which prevent more than 1 taxpayer from taking into account the same qualified domestic manufacturing income, and

“(B) which require or restrict the allocation of items under paragraph (6) and require such reporting for purposes of carrying out such paragraph as the Secretary determines appropriate.

“(8) Phase-in of exclusion—In the case of any taxable year beginning before January 1, 2017, the term “qualified domestic manufacturing income” shall be an amount equal to the product of the qualified domestic manufacturing income determined without regard to this paragraph, multiplied by—

“(A) in the case of any taxable year beginning in 2015, 33 percent, and

“(B) in the case of any taxable year beginning in 2016, 67 percent.”

“169. Adjusted net capital gain

“(a) In general—If for any taxable year a taxpayer other than a corporation has an adjusted net capital gain, 40 percent of the amount of the adjusted net capital gain shall be allowed as a deduction from gross income.

“(b) Adjusted net capital gain—For purposes of this section, the term “adjusted net capital gain” means the sum of—

“(1) net capital gain reduced (but not below zero) by the net collectibles gain, plus

“(2) qualified dividend income.

“(c) Net capital gain reduced by amounts taken into account as investment income—For purposes of this section, the net capital gain for any taxable year shall be reduced (but not below zero) by the amount which the taxpayer takes into account as investment income under section 163(d)(4)(B)(iii).

“(d) Net collectibles gain—For purposes of this section—

“(1) In general—The term “net collectibles gain” means the excess (if any) of—

“(A) collectibles gain, over

“(B) collectibles loss.

“(2) Collectibles gain and loss—The terms “collectibles gain” and “collectibles loss” mean gain or loss (respectively) from the sale or exchange of a collectible (as defined in section 408(m) without regard to paragraph (3) thereof) which is a capital asset held for more than 1 year but only to the extent such gain is taken into account in computing gross income and such loss is taken into account in computing taxable income.

“(3) Partnerships, etc—For purposes of paragraph (2), any gain from the sale of an interest in a partnership, S corporation, or trust which is attributable to unrealized appreciation in the value of collectibles shall be treated as gain from the sale or exchange of a collectible. Rules similar to the rules of section 751 shall apply for purposes of the preceding sentence.

“(e) Qualified dividend income—For purposes of this section—

“(1) In general—The term “qualified dividend income” means dividends received during the taxable year from—

“(A) domestic corporations, and

“(B) qualified foreign corporations.

“(2) Certain dividends excluded—Such term shall not include—

“(A) any dividend from a corporation which for the taxable year of the corporation in which the distribution is made, or the preceding taxable year, is a corporation exempt from tax under section 501 or 521,

“(B) any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.), and

“(C) any dividend described in section 404(k).

“(3) Coordination with section 246(c)—Such term shall not include any dividend on any share of stock—

“(A) with respect to which the holding period requirements of section 246(c) are not met (determined without regard to paragraph (5) of section 246(c) and by substituting in section 246(c) “60 days” for “45 days” each place it appears and by substituting “121-day period” for “91-day period”), or

“(B) to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.

“(4) Qualified foreign corporations

“(A) In general—Except as otherwise provided in this subparagraph, the term “qualified foreign corporation” means any foreign corporation if—

“(i) such corporation is incorporated in a possession of the United States, or

“(ii) such corporation is eligible as a qualified resident for all of the benefits provided under a comprehensive income tax treaty with the United States which the Secretary determines is satisfactory for purposes of this paragraph and which includes an exchange of information program.

“(B) Dividends on stock readily tradable on United States securities market—A foreign corporation not otherwise treated as a qualified foreign corporation under subparagraph (A) shall be so treated with respect to any dividend paid by such corporation if the stock with respect to which such dividend is paid is readily tradable on an established securities market in the United States.

“(C) Exclusion of dividends of certain foreign corporations—The term “qualified foreign corporation” shall not include any foreign corporation which for the taxable year of the corporation in which the dividend was paid, or the preceding taxable year, is a passive foreign investment company (as defined in section 1297).

“(5) Treatment of dividends from regulated investment companies and real estate investment trusts—A dividend received from a regulated investment company or a real estate investment trust shall be subject to the limitations prescribed in sections 854 and 857.”

“(8) Adjusted net capital gain—The deduction allowed by section 169.”

“(c) Standard deduction—For purposes of this subtitle—

“(1) In general—Except as otherwise provided in this subsection, the term “standard deduction” means—

“(A) $22,000, in the case of a joint return, and

“(B) one-half of the amount in effect under subparagraph (A) for the taxable year, in any other case.

“(2) Phaseout of standard deduction—The amount of the standard deduction determined under this subsection (without regard to this paragraph and after the application of paragraph (4)) shall be reduced (but not below zero) by an amount equal to 20 percent of the excess (if any) of—

“(A) the taxpayer’s modified adjusted gross income (as defined in section 2(b)) for the taxable year, over

“(B)

“(i) the joint return standard deduction phaseout threshold for the taxable year, in the case of a taxpayer described in paragraph (1)(A), and

“(ii) the non-joint return standard deduction phaseout threshold for the taxable year, in any other case.

“(3) Standard deduction phaseout thresholds

“(A) Joint return standard deduction phaseout threshold—The term “joint return standard deduction phaseout threshold” means, with respect to any taxable year—

“(i) the dollar amount in effect under section 1(e)(3)(A) for such taxable year, plus

“(ii) the product of—

“(I) the dollar amount in effect under section 1(b)(1)(A) for such taxable year, multiplied by

“(II) 3.

“(B) Non-joint return standard deduction phaseout threshold—The term “non-joint return standard deduction phaseout threshold” means, with respect to any taxable year—

“(i) the dollar amount in effect under section 1(e)(3)(B) for such taxable year, plus

“(ii) the product of—

“(I) the dollar amount in effect under section 1(b)(1)(B) for such taxable year, multiplied by

“(II) 3.

“(4) Limitation on standard deduction in the case of certain dependents—In the case of an individual who is a dependent of another taxpayer for a taxable year beginning in the calendar year in which the individual’s taxable year begins, the standard deduction applicable to such individual for such individual’s taxable year shall not exceed the greater of—

“(A) $500, or

“(B) the sum of $250 and such individual’s earned income (as defined in section 24(d)(2)).

“(5) Certain individuals, etc., not eligible for standard deduction—In the case of—

“(A) a married individual filing a separate return where such individual’s spouse elects to itemize deductions,

“(B) a nonresident alien individual,

“(C) an individual making a return under section 443(a)(1) for a period of less than 12 months on account of a change in his annual accounting period, or

“(D) an estate or trust, common trust fund, or partnership,

“(6) Inflation adjustments—In the case of any taxable year beginning after 2014, each of the dollar amounts in paragraphs (1)(A) and (4) shall be increased by an amount equal to—

“(A) such dollar amount, multiplied by

“(B) the cost-of-living adjustment determined—

“(i) in the case of the dollar amount in paragraph (1)(A), under section 1(c)(2)(A) for the calendar year in which the taxable year begins,

“(ii) in the case of the dollar amount in paragraph (4)(A), under section 1(c)(2)(A) for the calendar year in which the taxable year begins determined by substituting “calendar year 1987” for “calendar year 2012” in clause (ii) thereof, and

“(iii) in the case of the dollar amount in paragraph (4)(B), under section 1(c)(2)(A) for the calendar year in which the taxable year begins determined by substituting “calendar year 1997” for “calendar year 2012” in clause (ii) thereof.”

“(f) Application of phaseout of standard deduction to itemized deductions

“(1) In general—In the case of an individual whose modified adjusted gross income (as defined in section 2(b)) exceeds the amount in effect under subsection (c)(2)(B) with respect to the taxpayer for the taxable year, the amount of the itemized deductions otherwise allowable for the taxable year shall be reduced by the lesser of—

“(A) 20 percent of the excess described in subsection (c)(2) with respect to such taxpayer for such taxable year, or

“(B) the amount of the taxpayer’s standard deduction for such taxable year (determined without regard to subsection (c)(2) and without regard to any election to itemize deductions).

“(2) Coordination with other limitations—This subsection shall be applied after the application of any other limitation on the allowance of any itemized deduction.

“(3) Exception for estates and trusts—This subsection shall not apply to any estate or trust.”

“24. Child and dependent tax credit

“(a) Allowance of credit—There shall be allowed as a credit against the tax imposed by this chapter for the taxable year with respect to each dependent of the taxpayer an amount equal to $500 ($1,500 in the case of a qualifying child).

“(b) Phaseout of credit

“(1) In general—The credit allowed under subsection (a) (determined without regard to this subsection) shall be reduced (but not below zero) by 5 percent of the excess (if any) of—

“(A) the taxpayer’s modified adjusted gross income (as defined in section 2(b)), over

“(B)

“(i) the joint return child credit phaseout threshold, in the case of a joint return or a surviving spouse (as defined in section 2(a)), or

“(ii) the non-joint return child credit phaseout threshold, in any other case.

“(2) Joint return child credit phaseout threshold—For purposes of this section, the term “joint return child credit phaseout threshold” means, with respect to any taxable year, the sum of—

“(A) the joint return standard deduction phaseout threshold (as defined in section 63(c)(3)(A)), plus

“(B) an amount equal to—

“(i) the dollar amount in effect under section 63(c)(1)(A) for such taxable year, divided by

“(ii) 0.2.

“(3) Non-joint return child credit phaseout threshold—For purposes of this section, the term “non-joint return child credit phaseout threshold” means, with respect to any taxable year, the sum of—

“(A) the non-joint return standard deduction phaseout threshold (as defined in section 63(c)(3)(B)), plus

“(B) an amount equal to—

“(i) the dollar amount in effect under section 63(c)(1)(B) for such taxable year, divided by

“(ii) 0.2.

“(c) Qualifying child—For purposes of this section—

“(1) In general—Except as provided in paragraph (2), the term “qualifying child” has the meaning given such term by section 7705.

“(2) Exception for certain noncitizens—The term “qualifying child” shall not include any individual who would not be a dependent if subparagraph (A) of section 7705(b)(3) were applied without regard to all that follows “resident of the United States”.

“(d) Portion of credit refundable

“(1) In general—The aggregate credits allowed under subpart C shall be increased by the lesser of—

“(A) the credit which would be allowed under this section without regard to this subsection and the limitation under section 26(a), or

“(B) the amount by which the aggregate amount of credits allowed under the subpart (determined without regard to this subsection) would increase if the limitation under section 26(a) were increased by 25 percent of the taxpayer’s earned income for the taxable year.

“(2) Earned income—For purposes of this subsection—

“(A) In general—The term “earned income” means—

“(i) the taxpayer’s wages, salaries, tips, and other employee compensation, but only if such amounts are includible in gross income for the taxable year, plus

“(ii) the taxpayer’s net earnings from self-employment for the taxable year (within the meaning of section 1402(a)) determined with regard to the deduction allowed to the taxpayer by section 164(f).

“(B) Special rules—For purposes of subparagraph (A)—

“(i) the earned income of an individual shall be computed without regard to any community property laws,

“(ii) no amount received as a pension or annuity shall be taken into account,

“(iii) no amount to which section 871(a) applies (relating to income of nonresident alien individuals not connected with United States business) shall be taken into account,

“(iv) no amount received for services provided by an individual while the individual is an inmate at a penal institution shall be taken into account,

“(v) no amount described in subparagraph (A) received for service performed in work activities as defined in paragraph (4) or (7) of section 407(d) of the Social Security Act to which the taxpayer is assigned under any State program under part A of title IV of such Act shall be taken into account, but only to the extent such amount is subsidized under such State program, and

“(vi) amounts excluded from gross income by reason of section 112 shall be taken into account as earned income.

“(C) Special rule for taxable years beginning before 2018—In the case of any taxable year beginning before January 1, 2018, the earned income of the taxpayer taken into account under paragraph (1) shall be reduced (but not below zero) by $3,000.

“(3) Exception for taxpayers excluding foreign earned income—Paragraph (1) shall not apply to any taxpayer for any taxable year if such taxpayer elects to exclude any amount from gross income under section 911 for such taxable year.

“(e) Inflation adjustment—In the case of any taxable year beginning after 2014, each dollar amount in subsection (a) shall be increased by an amount equal to—

“(1) such dollar amount, multiplied by

“(2) the cost-of-living adjustment determined under section 1(c)(2)(A) for the calendar year in which the taxable year begins.

“(f) Identification requirements

“(1) In general—No credit shall be allowed under this section to a taxpayer with respect to any dependent unless the taxpayer includes the name and taxpayer identification number of such dependent on the return of tax for the taxable year.

“(2) Additional identification requirement with respect to refundable credit

“(A) In general—Subsection (d) shall not apply to any taxpayer for any taxable year unless the taxpayer includes the taxpayer’s Social Security number on the return of tax for such taxable year.

“(B) Joint returns—In the case of a joint return, the requirement of subparagraph (A) shall be treated as met if the Social Security number of either spouse is included on such return.

“(g) Taxable year must be full taxable year—Except in the case of a taxable year closed by reason of the death of the taxpayer, no credit shall be allowable under this section in the case of a taxable year covering a period of less than 12 months.”

“(I) an omission of a correct TIN under section 24(f)(1) (relating to the child and dependent tax credit), or a correct Social Security number under section 24(f)(2) (relating to the refundable portion of child and dependent tax credit), to be included on a return,”

“(c) Adjustment in child and dependent tax credit—If a return is made for a short period by reason of subsection (a)(1) and if the tax is not computed under subsection (b)(2), then the credit allowed under section 24 shall be reduced to an amount which bears the same ratio to the full amount of such credit as the number of months in the short period bears to 12.”

“32. Earned income

“(a) In general—In the case of an individual who is an eligible individual for any taxable year, there shall be allowed as a credit against the tax imposed by this subtitle for such taxable year an amount equal to the taxpayer’s employment-related taxes for such taxable year.

“(b) Limitations

“(1) Dollar limitation—The credit allowed under subsection (a) shall not exceed—

“(A) in the case of a taxpayer with 2 or more qualifying children, $3,000 ($4,000 in the case of a joint return), and

“(B) in the case of a taxpayer with 1 qualifying child, $2,400.

“(2) Phase-out of credit—The credit allowed under subsection (a) (determined after application of paragraph (1)) shall be reduced (but not below zero) by the sum of—

“(A) 19 percent of so much of the taxpayer’s adjusted gross income (reduced by the amount of any excess described in subparagraph (B)) as exceeds $20,000 ($27,000 in the case of a joint return), plus

“(B) so much of the taxpayer’s investment income for the taxable year as exceeds $3,300.

“(c) Definitions—For purposes of this section—

“(1) Eligible individual

“(A) In general—The term “eligible individual” means any individual who has a qualifying child for the taxable year.

“(B) Qualifying child ineligible—If an individual is the qualifying child of a taxpayer for any taxable year of such taxpayer beginning in a calendar year, such individual shall not be treated as an eligible individual for any taxable year of such individual beginning in such calendar year.

“(C) Exception for individual claiming benefits under section 911—The term “eligible individual” does not include any individual who claims the benefits of section 911 (relating to citizens or residents living abroad) for the taxable year.

“(D) Limitation on eligibility of nonresident aliens—The term “eligible individual” shall not include any individual who is a nonresident alien individual for any portion of the taxable year unless such individual is treated for such taxable year as a resident of the United States for purposes of this chapter by reason of an election under subsection (g) or (h) of section 6013.

“(2) Employment-related taxes—The term “employment-related taxes” means, with respect to any taxpayer for any taxable year, the sum of—

“(A) any tax imposed under sections 3101 or 3111 on the wages (as defined in section 3121(a)) received by the taxpayer during the calendar year in which the taxable year begins,

“(B) any tax imposed under sections 3201(a), 3211(a), or 3221(a) on the compensation (as defined in section 3231(e)) received by the taxpayer during the calendar year in which the taxable year begins, and

“(C) any tax imposed under section 1401 on the self-employment income of the taxpayer for the taxable year.

“(3) Qualifying child

“(A) In general—The term “qualifying child” means a qualifying child of the taxpayer (within the meaning of section 7705, determined without regard to subsections (c)(1)(D) and (e) thereof).

“(B) Place of abode—For purposes of subparagraph (A), the requirements of section 7705(c)(1)(B) shall be met only if the principal place of abode is in the United States.

“(C) Treatment of military personnel stationed outside the United States—For purposes of subparagraph (B), the principal place of abode of a member of the Armed Forces of the United States shall be treated as in the United States during any period during which such member is stationed outside the United States while serving on extended active duty with the Armed Forces of the United States. For purposes of the preceding sentence, the term “extended active duty” means any period of active duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period.

“(4) Investment income—For purposes of paragraph (1), the term “investment income” means—

“(A) interest or dividends to the extent includible in gross income for the taxable year,

“(B) interest received or accrued during the taxable year which is exempt from tax imposed by this chapter,

“(C) the excess (if any) of—

“(i) gross income from rents or royalties not derived in the ordinary course of a trade or business, over

“(ii) the sum of—

“(I) the deductions (other than interest) which are clearly and directly allocable to such gross income, plus

“(II) interest deductions properly allocable to such gross income,

“(D) the capital gain net income (as defined in section 1222) of the taxpayer for such taxable year, and

“(E) the excess (if any) of—

“(i) the aggregate income from all passive activities for the taxable year (determined without regard to any amount with respect to which a tax described in subsection (c)(2) is imposed or an amount described in a preceding subparagraph), over

“(ii) the aggregate losses from all passive activities for the taxable year (as so determined).

“(d) Identification requirements

“(1) In general—No credit shall be allowed under this section unless the taxpayer includes on the return of tax for the taxable year—

“(A) the taxpayer’s Social Security number, and

“(B) the name, age, and Social Security number of each qualifying child taken into account under subsection (b)(1).

“(2) Joint returns—In the case of a joint return, the requirement of paragraph (1)(A) shall be treated as met if the Social Security number of either spouse is included on such return.

“(3) Other methods of providing children’s information—The Secretary may prescribe other methods for providing the information described in paragraph (1)(B).

“(e) Restrictions on taxpayers who improperly claimed credit in prior year

“(1) Taxpayers making prior fraudulent or reckless claims

“(A) In general—No credit shall be allowed under this section for any taxable year in the disallowance period.

“(B) Disallowance period—For purposes of paragraph (1), the disallowance period is—

“(i) the period of 10 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to fraud, and

“(ii) the period of 2 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to reckless or intentional disregard of rules and regulations (but not due to fraud).

“(2) Taxpayers making improper prior claims—In the case of a taxpayer who is denied credit under this section for any taxable year as a result of the deficiency procedures under subchapter B of chapter 63, no credit shall be allowed under this section for any subsequent taxable year unless the taxpayer provides such information as the Secretary may require to demonstrate eligibility for such credit.

“(f) Other special rules—For purposes of this section—

“(1) Married individuals—In the case of an individual who is married (within the meaning of section 7703), this section shall apply only if a joint return is filed for the taxable year under section 6013.

“(2) Taxable year must be full taxable year—Except in the case of a taxable year closed by reason of the death of the taxpayer, no credit shall be allowable under this section in the case of a taxable year covering a period of less than 12 months.

“(3) Coordination with certain means-tested programs—For purposes of—

“(A) the United States Housing Act of 1937,

“(B) title V of the Housing Act of 1949,

“(C) section 101 of the Housing and Urban Development Act of 1965,

“(D) sections 221(d)(3), 235, and 236 of the National Housing Act, and

“(E) the Food and Nutrition Act of 2008,

“(4) Coordination with payroll tax credits—The credit allowed under subsection (a) with respect to any taxpayer for any taxable year shall be reduced by the sum of the credits allowed under sections 3103 and 3203 with respect to such taxpayer for such taxable year.

“(g) Application to certain individuals without qualifying children—For purposes of this section and sections 3103 and 3203—

“(1) In general—In the case of an individual described in paragraph (2)—

“(A) such individual shall be treated as an eligible individual,

“(B) notwithstanding subsection (i), the dollar limitation applicable to such individual under subsection (b)(1) shall be $100 (twice such amount in the case of a joint return),

“(C) subsection (b)(2)(A) shall be applied by substituting “$8,000 ($13,000” for “$20,000 ($27,000”, and

“(D) subsection (i)(1) shall not apply and the employment-related taxes with respect to such individual for any taxable year shall not exceed the sum of—

“(i) any tax imposed under section 3101 on the wages (as defined in section 3121(a)) received by the taxpayer during the calendar year in which the taxable year begins,

“(ii) any tax imposed under sections 3201(a) (and so much of the tax imposed by section 3211(a) as is attributable to the rates of tax under subsections (a) and (b) of section 3101) on the compensation (as defined in section 3231(e)) received by the taxpayer during the calendar year in which the taxable year begins, and

“(iii) 50 percent of any tax imposed under section 1401 on the self-employment income of the taxpayer for the taxable year.

“(2) Individual to whom subsection applies—An individual is described in this paragraph for any taxable year if—

“(A) such individual does not have a qualifying child for the taxable year,

“(B) such individual’s principal place of abode is in the United States for more than one-half of such taxable year,

“(C) such individual (or, if the individual is married (within the meaning of section 7703), either the individual or the individual’s spouse) has attained age 25 but not attained age 65 before the close of the taxable year, and

“(D) such individual is not a dependent of another taxpayer for any taxable year beginning in the same calendar year as such taxable year.

“(h) Inflation adjustment—In the case of any taxable year beginning after 2014, both dollar amounts in subsection (b)(1)(A), the dollar amount in subsection (b)(1)(B), both dollar amounts in subsection (b)(2)(A), the dollar amount in subsection (b)(2)(B), the $100 amount in subsection (g)(1)(B), the $8,000 and $13,000 amounts in subsection (g)(1)(C), the $4,000 amount in subsection (i)(2), and the $3,000 amount in subsection (i)(3), shall each be increased by an amount equal to—

“(1) such dollar amount, multiplied by

“(2) the cost-of-living adjustment determined under section 1(c)(2)(A) for the calendar year in which the taxable year begins.

“(i) Special rules for taxable years beginning before 2018—In the case of any taxable year beginning before January 1, 2018—

“(1) subsection (a) shall be applied by substituting “200 percent of the taxpayer’s employment-related taxes” for “the taxpayer’s employment-related taxes”,

“(2) subsection (b)(1)(A) shall be applied by substituting “$4,000” for “$3,000 ($4,000 in the case of a joint return)”, and

“(3) subsection (b)(1)(B) shall be applied by substituting “$3,000” for “$2,400”.”

“25A. American opportunity tax credit

“(a) In general—In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of—

“(1) 100 percent of so much of the qualified tuition and related expenses paid by the taxpayer during the taxable year (for education furnished to any eligible student for whom an election is in effect under this section for such taxable year during any academic period beginning in such taxable year) as does not exceed $2,000, plus

“(2) 25 percent of so much of such expenses so paid as exceeds the dollar amount in effect under paragraph (1) but does not exceed twice such dollar amount.

“(b) Portion of credit refundable—So much of the credit allowable under subsection (a) (determined without regard to this subsection and section 26(a) and after application of all other provisions of this section) as does not exceed $1,500 shall be treated as a credit allowable under subpart C (and not under this part). The preceding sentence shall not apply to any taxpayer for any taxable year if such taxpayer is a child to whom section 1(d) applies for such taxable year.

“(c) Limitation based on modified adjusted gross income

“(1) In general—The amount allowable as a credit under subsection (a) for any taxable year shall be reduced (but not below zero) by an amount which bears the same ratio to the amount so allowable (determined without regard to this subsection and subsection (b) but after application of all other provisions of this section) as—

“(A) the excess of—

“(i) the taxpayer’s modified adjusted gross income for such taxable year, over

“(ii) $43,000 (twice such amount in the case of a joint return), bears to

“(B) $20,000 (twice such amount in the case of a joint return).

“(2) Modified adjusted gross income—For purposes of this subsection, the term “modified adjusted gross income” means the adjusted gross income of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933.

“(d) Other limitations

“(1) Credit allowed only for 4 taxable years—An election to have this section apply may not be made for any taxable year if such an election (by the taxpayer or any other individual) is in effect with respect to such student for any 4 prior taxable years.

“(2) Credit allowed only for first 4 years of postsecondary education—No credit shall be allowed under subsection (a) for a taxable year with respect to the qualified tuition and related expenses of an eligible student if the student has completed (before the beginning of such taxable year) the first 4 years of postsecondary education at an eligible educational institution.

“(e) Definitions—For purposes of this section—

“(1) Eligible student—The term “eligible student” means, with respect to any academic period, a student who—

“(A) meets the requirements of section 484(a)(1) of the Higher Education Act of 1965 (20 U.S.C. 1091(a)(1)), as in effect on August 5, 1997, and

“(B) is carrying at least 1/2 the normal full-time work load for the course of study the student is pursuing.

“(2) Qualified tuition and related expenses

“(A) In general—The term “qualified tuition and related expenses” means tuition, fees, and course materials, required for enrollment or attendance of—

“(i) the taxpayer,

“(ii) the taxpayer’s spouse, or

“(iii) any dependent of the taxpayer,

“(B) Exception for education involving sports, etc—Such term does not include expenses with respect to any course or other education involving sports, games, or hobbies, unless such course or other education is part of the individual’s degree program.

“(C) Exception for nonacademic fees—Such term does not include student activity fees, athletic fees, insurance expenses, or other expenses unrelated to an individual's academic course of instruction.

“(3) Eligible educational institution—The term “eligible educational institution” means an institution—

“(A) which is described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088), as in effect on August 5, 1997, and

“(B) which is eligible to participate in a program under title IV of such Act.

“(f) Special rules

“(1) Identification requirement—No credit shall be allowed under subsection (a) to a taxpayer with respect to the qualified tuition and related expenses of an individual unless the taxpayer includes the name and taxpayer identification number of such individual, and the employer identification number of any institution to which such expenses were paid, on the return of tax for the taxable year.

“(2) Adjustment for certain scholarships, etc

“(A) In general—The amount of qualified tuition and related expenses otherwise taken into account under subsection (a) with respect to an individual for an academic period shall be reduced (before the application of subsection (c)) by the sum of any amounts paid for the benefit of such individual which are allocable to such period as—

“(i) a qualified scholarship which is excludable from gross income under section 117,

“(ii) an educational assistance allowance under chapter 30, 31, 32, 34, or 35 of title 38, United States Code, or under chapter 1606 of title 10, United States Code, and

“(iii) a payment (other than a gift, bequest, devise, or inheritance within the meaning of section 102(a)) for such individual's educational expenses, or attributable to such individual's enrollment at an eligible educational institution, which is excludable from gross income under any law of the United States.

“(B) Coordination with Pell Grants not used for qualified tuition and related expenses—For purposes of subparagraph (A), the amount of any Federal Pell Grant under section 401 of the Higher Education Act of 1965 (20 U.S.C. 1070a) shall be reduced (but not below zero) by the amount of expenses (other than qualified tuition and related expenses) which are taken into account in determining the cost of attendance (as defined in section 472 of the Higher Education Act of 1965, as in effect on the date of the enactment of this paragraph) of such individual at an eligible educational institution for the academic period for which the credit under this section is being determined.

“(3) Treatment of expenses paid by dependent—If an individual is a dependent of another taxpayer for a taxable year beginning in the calendar year in which such individuals taxable year begins—

“(A) no credit shall be allowed under subsection (a) to such individual for such individual’s taxable year, and

“(B) qualified tuition and related expenses paid by such individual during such individual’s taxable year shall be treated for purposes of this section as paid by such other taxpayer.

“(4) Treatment of certain prepayments—If qualified tuition and related expenses are paid by the taxpayer during a taxable year for an academic period which begins during the first 3 months following such taxable year, such academic period shall be treated for purposes of this section as beginning during such taxable year.

“(5) Denial of double benefit—No credit shall be allowed under this section for any amount for which a deduction is allowed under any other provision of this chapter.

“(6) No credit for married individuals filing separate returns—If the taxpayer is a married individual (within the meaning of section 7703), this section shall apply only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.

“(7) Nonresident aliens—If the taxpayer is a nonresident alien individual for any portion of the taxable year, this section shall apply only if such individual is treated as a resident alien of the United States for purposes of this chapter by reason of an election under subsection (g) or (h) of section 6013.

“(g) Inflation adjustment

“(1) In general—In the case of a taxable year beginning after 2018, the $2,000 amount in subsection (a)(1), the $1,500 amount in subsection (b), and the $43,000 amount in subsection (c)(1)(A)(ii) shall each be increased by an amount equal to—

“(A) such dollar amount, multiplied by

“(B) the cost-of-living adjustment determined under section 1(c)(2)(A) for the calendar year in which the taxable year begins, determined by substituting “calendar year 2017” for “calendar year 2012” in clause (ii) thereof.

“(2) Rounding—If any amount as adjusted under paragraph (1) is not a multiple of $100 ($1,000 in the case of the amount in subsection (c)(1)(A)(ii)), such amount shall be rounded to the next lowest multiple of $100 ($1,000 in the case of the amount in subsection (c)(1)(A)(ii)).

“(h) Regulations—The Secretary may prescribe such regulations or other guidance as may be necessary or appropriate to carry out this section, including regulations providing for a recapture of the credit allowed under this section in cases where there is a refund in a subsequent taxable year of any amount which was taken into account in determining the amount of such credit.”

“(A) Except in the case of rollover contributions, no contribution will be accepted after December 31, 2014.”

“(3) Application to only 1 sale or exchange every 5 years—Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 5-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied.”

“(h) Phaseout based on modified adjusted gross income

“(1) In general—If the modified adjusted gross income of the taxpayer for the taxable year exceeds $250,000 (twice such amount in the case of a joint return), the amount which would (but for this subsection) be excluded from gross income under subsection (a) for such taxable year shall be reduced (but not below zero) by the amount of such excess.

“(2) Modified adjusted gross income—For purposes of this subsection, the term “modified adjusted gross income” has the meaning given such term by section 2 determined after the application of this section but without regard to this subsection.”

“(3) 2 percent floor on charitable deduction for individuals—The amount of charitable contributions taken into account under this section as made by any individual during a taxable year (determined without regard to subsection (d)) shall be reduced by 2 percent of the taxpayer’s contribution base for such taxable year. Such reduction shall apply—

“(A) first, to charitable contributions to which paragraph (1)(B) applies to the extent thereof,

“(B) second, to charitable contributions to which paragraph (1)(C) applies to the extent thereof, and

“(C) third, to charitable contributions to which paragraph (1)(A) applies to the extent thereof.”

“(2) Treatment of charitable contributions made by individuals before due date of return—If any charitable contribution is made by an individual after the close of a taxable year but not later than the due date (determined without regard to extensions) for the return of tax for such taxable year, then the taxpayer may elect to treat such charitable contribution as made in such taxable year. Such election may be made only at the time of the filing of such return of tax and shall be signified in such manner as the Secretary may provide.”

“262A. Expenses attributable to being an employee

“(a) In general—Except as otherwise provided in this section, no deduction shall be allowed with respect to any trade or business of the taxpayer which consists of the performance of services by the taxpayer as an employee.

“(b) Exception for above-the-Line deductions—Subsection (a) shall not apply to any deduction allowable (determined without regard to subsection (a)) in determining adjusted gross income.”

“(5) Limitation in case of individuals—In the case of a taxpayer other than a corporation—

“(A) paragraphs (1) and (2) of subsection (a) shall only apply to taxes which are paid or accrued in carrying on a trade or business or an activity described in section 212, and

“(B) paragraph (3) of subsection (a) shall not apply to State and local taxes.”

“(k) Termination—No deduction shall be allowed under subsection (a) with respect to any taxable year beginning after December 31, 2014.”

“(10) Amortizable bond premium—The deduction allowed under section 171(a)(1).”

“(e) Limitation on exclusion of lodging

“(1) In general—The aggregate amount excluded from gross income of the taxpayer under subsections (a) and (d) with respect to lodging for any taxable year shall not exceed $50,000 (half such amount in the case of a married individual filing a separate return).

“(2) Limitation to 1 home—Subsections (a) and (d) (separately and in combination) shall not apply with respect to more than 1 residence of the taxpayer at any given time. In the case of a joint return, the preceding sentence shall apply separately to each spouse for any period during which each spouse resides separate from the other spouse in a residence which is provided in connection with the employment of each spouse, respectively.”

“(f) Basis must be consistent with estate tax return—For purposes of this section—

“(1) In general—The basis of any property to which subsection (a) applies shall not exceed—

“(A) in the case of property the final value of which has been determined for purposes of the tax imposed by chapter 11 on the estate of such decedent, such value, and

“(B) in the case of property not described in subparagraph (A) and with respect to which a statement has been furnished under section 6035(a) identifying the value of such property, such value.

“(2) Exception—Paragraph (1) shall only apply to any property whose inclusion in the decedent’s estate increased the liability for the tax imposed by chapter 11 (reduced by credits allowable against such tax) on such estate.

“(3) Regulations—The Secretary may by regulations provide exceptions to the application of this subsection.”

“(12) in lieu of the deduction allowable under section 164(f) (relating to deduction for one-half of self-employment taxes), there shall be allowed as a deduction an amount equal to the sum of—

“(A) 7.1064 percent of so much of the individual’s net earnings from self-employment for the taxable year (determined without regard to this paragraph) as does not exceed an amount equal to the product of 1.0765 and the excess (if any) of—

“(i) the contribution and benefit base (as determined under section 230 of the Social Security Act) in effect for the calendar year in which the taxable year begins, over

“(ii) the wages (within the meaning of subsection (b)(1)) paid to the individual during such taxable year, plus

“(B) 1.4293 percent of the excess (if any) of the individual’s net earnings from self-employment for the taxable year (determined without regard to this paragraph) over the amount of such net earnings taken into account under subparagraph (A);”

“(11) in lieu of the deduction allowable under section 164(f) of the Internal Revenue Code of 1986 (relating to deduction for one-half of self-employment taxes), there shall be allowed as a deduction an amount equal to the sum of—

“(A) 7.1064 percent of so much of the individual's net-earnings from self-employment for the taxable year (determined without regard to this paragraph) as does not exceed an amount equal to the product of 1.0765 and the excess (if any) of—

“(i) the contribution and benefit base (as determined under section 230) in effect for the calendar year in which the taxable year begins,

“(ii) the wages (within the meaning of section 1402(b)(1) of the Internal Revenue Code of 1986) paid to the individual during such taxable year, plus

“(B) 1.4293 percent of the excess (if any) of such net earnings over the amount of such net earnings taken into account under subparagraph (A);”

“3511. Certified professional employer organizations

“(a) General rules—For purposes of the taxes and other obligations imposed by this subtitle—

“(1) a certified professional employer organization shall be treated as the employer (and no other person shall be treated as the employer) of any work site employee performing services for any customer of such organization, but only with respect to remuneration remitted by such organization to such work site employee, and

“(2) the exemptions, exclusions, definitions, and other rules which are based on type of employer and which would (but for paragraph (1)) apply shall apply with respect to such taxes imposed on such remuneration.

“(b) Successor employer status—For purposes of sections 3121(a)(1), 3231(e)(2)(C), and 3306(b)(1)—

“(1) a certified professional employer organization entering into a service contract with a customer with respect to a work site employee shall be treated as a successor employer and the customer shall be treated as a predecessor employer during the term of such service contract, and

“(2) a customer whose service contract with a certified professional employer organization is terminated with respect to a work site employee shall be treated as a successor employer and the certified professional employer organization shall be treated as a predecessor employer.

“(c) Liability of certified professional employer organization—Solely for purposes of its liability for the taxes and other obligations imposed by this subtitle—

“(1) a certified professional employer organization shall be treated as the employer of any work site employee (other than a person described in subsection (e)) who is performing services covered by a contract meeting the requirements of section 7706(e)(2), but only with respect to remuneration remitted by such organization to such individual, and

“(2) exemptions, exclusions, definitions, and other rules which are based on type of employer and which would (but for paragraph (1)) apply shall apply with respect to such taxes imposed on such remuneration.

“(d) Special rule for related party—This section shall not apply in the case of a customer which bears a relationship to a certified professional employer organization described in section 267(b) or 707(b). For purposes of the preceding sentence, such sections shall be applied by substituting “10 percent” for “50 percent”.

“(e) Special rule for certain individuals—For purposes of the taxes imposed under this subtitle, an individual with net earnings from self-employment derived from the customer’s trade or business (including a partner in a partnership that is a customer), is not a work site employee with respect to remuneration paid by a certified professional employer organization.

“(f) Regulations—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.”

“7706. Certified professional employer organizations

“(a) In general—For purposes of this title, the term certified professional employer organization means a person who applies to be treated as a certified professional employer organization for purposes of section 3511 and who has been certified by the Secretary as meeting the requirements of subsection (b).

“(b) Certification requirements—A person meets the requirements of this subsection if such person—

“(1) demonstrates that such person (and any owner, officer, and such other persons as may be specified in regulations) meets such requirements as the Secretary shall establish with respect to tax status, background, experience, business location, and annual financial audits,

“(2) agrees that it will satisfy the bond and independent financial review requirements of subsections (c) on an ongoing basis,

“(3) agrees that it will satisfy such reporting obligations as may be imposed by the Secretary,

“(4) computes its taxable income using an accrual method of accounting unless the Secretary approves another method,

“(5) agrees to verify on such periodic basis as the Secretary may prescribe that it continues to meet the requirements of this subsection, and

“(6) agrees to notify the Secretary in writing, within such time as the of Secretary may prescribe, of any change that materially affects the continuing accuracy of any agreement or information which was previously made or provided.

“(c) Bond and independent financial review

“(1) In general—An organization meets the requirements of this paragraph if such organization—

“(A) meets the bond requirements of paragraph (2), and

“(B) meets the independent financial review requirements of paragraph (3).

“(2) Bond

“(A) In general—A certified professional employer organization meets the requirements of this paragraph if the organization has posted a bond for the payment of taxes under subtitle C (in a form acceptable to the Secretary) that is in an amount at least equal to the amount specified in subparagraph (B).

“(B) Amount of bond

“(i) In general—For the period April 1 of any calendar year through March 31 of the following calendar year, the amount of the bond required is equal to the greater of—

“(I) 5 percent of the organization’s liability under section 3511 for taxes imposed by subtitle C during the preceding calendar year (but not to exceed $1,000,000), or

“(II) $50,000.

“(ii) Special rule for newly created professional employer organizations—During the first three full calendar years that an organization is in existence, subclause (I) of clause (i) shall not apply. For this purpose—

“(I) under rules provided by the Secretary, an organization is treated as in existence as of the date that such organization began providing services to any customer which were comparable to the services being provided with respect to work site employees, regardless of whether such date occurred before or after the organization is certified under subsection (b), and

“(II) an organization with liability under section 3511 for taxes imposed by subtitle C during the preceding calendar year in excess of $5,000,000 shall no longer be described in this clause (ii) as of April 1 of the year following such calendar year.

“(3) Independent financial review requirements—A certified professional employer organization meets the requirements of this paragraph if such organization—

“(A) has, as of the most recent audit date, caused to be prepared and provided to the Secretary (in such manner as the Secretary may prescribe) an opinion of an independent certified public accountant as to whether the certified professional employer organization’s financial statements are presented fairly in accordance with generally accepted accounting principles, and

“(B) provides to the Secretary an assertion regarding Federal employment tax payments and an examination level attestation on such assertion from an independent certified public accountant not later than the last day of the second month beginning after the end of each calendar quarter. Such assertion shall state that the organization has withheld and made deposits of all taxes imposed by chapters 21, 22, and 24 of the Internal Revenue Code in accordance with regulations imposed by the Secretary for such calendar quarter and such examination level attestation shall state that such assertion is fairly stated, in all material respects.

“(4) Controlled group rules—For purposes of the requirements of paragraphs (2) and (3), all professional employer organizations that are members of a controlled group within the meaning of sections 414(b) and (c) shall be treated as a single organization.

“(5) Failure to file assertion and attestation—If the certified professional employer organization fails to file the assertion and attestation required by paragraph (3) with respect to any calendar quarter, then the requirements of paragraph (3) with respect to such failure shall be treated as not satisfied for the period beginning on the due date for such attestation.

“(6) Audit date—For purposes of paragraph (3)(A), the audit date shall be six months after the completion of the organization’s fiscal year.

“(d) Suspension and revocation authority—The Secretary may suspend or revoke a certification of any person under subsection (b) for purposes of section 3511 if the Secretary determines that such person is not satisfying the agreements or requirements of subsections (b) or (c), or fails to satisfy applicable accounting, reporting, payment, or deposit requirements.

“(e) Work site employee—For purposes of this title—

“(1) In general—The term work site employee means, with respect to a certified professional employer organization, an individual who—

“(A) performs services for a customer pursuant to a contract which is between such customer and the certified professional employer organization and which meets the requirements of paragraph (2), and

“(B) performs services at a work site meeting the requirements of paragraph (3).

“(2) Service contract requirements—A contract meets the requirements of this paragraph with respect to an individual performing services for a customer if such contract is in writing and provides that the certified professional employer organization shall—

“(A) assume responsibility for payment of wages to the individual, without regard to the receipt or adequacy of payment from the customer for such services,

“(B) assume responsibility for reporting, withholding, and paying any applicable taxes under subtitle C, with respect to the individual’s wages, without regard to the receipt or adequacy of payment from the customer for such services,

“(C) assume responsibility for any employee benefits which the service contract may require the certified professional employer organization to provide, without regard to the receipt or adequacy of payment from the customer for such services,

“(D) assume responsibility for hiring, firing and for recruiting workers in addition to the customer’s responsibility for recruiting, hiring, and firing workers,

“(E) maintain employee records relating to the individual, and

“(F) agree to be treated as a certified professional employer organization for purposes of section 3511 with respect to such individual.

“(3) Work site coverage requirement—The requirements of this paragraph are met with respect to an individual if at least 85 percent of the individuals performing services for the customer at the work site where such individual performs services are subject to 1 or more contracts with the certified professional employer organization which meet the requirements of paragraph (2) (but not taking into account those individuals who are excluded employees within the meaning of section 414(q)(5)).

“(f) Determination of employment status—Except to the extent necessary for purposes of section 3511, nothing in this section shall be construed to affect the determination of who is an employee or employer for purposes of this title.

“(g) Regulations—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.”

“(4) Certified professional employer organizations—The fee charged under the program in connection with the certification by the Secretary of a professional employer organization under section 7706 shall be an annual fee not to exceed $1,000 per year.”