Title III — Business Tax Reform

“(b) Amount of tax

“(1) In general—Except as provided in paragraph (2), the amount of the tax imposed by subsection (a) shall be 25 percent of taxable income.

“(2) Phase-in for taxable years beginning before 2019

“(A) In general—In the case of taxable years beginning before 2019, the amount of tax imposed by subsection (a) shall be the sum of—

“(i) 25 percent of so much of the taxable income as does not exceed $75,000, and

“(ii) the applicable percentage of so much of taxable income as exceeds $75,000.

“(B) Applicable percentage—For purposes of this paragraph, the applicable percentage shall be determined in accordance with the following table:”

“76. Contributions to capital

“(a) In general—Gross income includes—

“(1) any contribution to the capital of any entity, and

“(2) any premium received by such entity with respect to any option on any interest in such entity.

“(b) Treatment of contributions in exchange for stock, etc

“(1) In general—In the case of any contribution of money or other property to a corporation in exchange for stock of such corporation—

“(A) such contribution shall not be treated for purposes of subsection (a) as a contribution to the capital of such corporation (and shall not be includible in the gross income of such corporation), and

“(B) no gain or loss shall be recognized to such corporation upon the issuance of such stock.

“(2) Treatment limited to value of stock—For purposes of this subsection, a contribution of money or other property to a corporation shall be treated as being in exchange for stock of such corporation only to the extent that the fair market value of such money and other property does not exceed the fair market value of such stock.

“(3) Application to entities other than corporations—In the case of any entity other than a corporation, rules similar to the rules of paragraphs (1) and (2) shall apply in the case of any contribution of money or other property to such entity in exchange for any interest in such entity.

“(c) Treasury stock treated as stock—Any reference in this section to stock shall be treated as including a reference to treasury stock.”

“(h) Special rule for casualty losses

“(1) Expenditures for repairs in connection with casualty losses—If a deduction is allowable under this section for any casualty loss with respect to any property, any expenditure made for any repair of damage to such property in connection with such casualty loss shall be treated as a permanent improvement made to increase the value of such property for purposes of section 263(a)(1).

“(2) Election to expense repair in lieu of deducting casualty loss—If the taxpayer elects the application of this paragraph with respect to any property with respect to which there is a casualty loss, no deduction shall be allowable under this section for the casualty loss with respect to such property and paragraph (1) shall not apply to expenditures made for repair of damage to such property in connection with such casualty loss. Any election under this paragraph shall be made not later than the due date for the return of tax (including extensions) for the taxable year in which the casualty loss occurs and, once made, may be revoked only with the consent of the Secretary.”

“(b) Applicable depreciation method—For purposes of this section—

“(1) In general—The applicable depreciation method is the straight line method.

“(2) Salvage value treated as zero—Salvage value shall be treated as zero.”

“(c) Applicable recovery period—For purposes of this section—

“(1) In general—Except as provided in paragraph (2), the applicable recovery period for any property is the class life of such property.

“(2) Special rules for determining class life of certain property

“(A) Property with no class life—In the case of personal property with no class life, the recovery period is 12 years.

“(B) Certain horses—In the case of any race horse, and any horse other than a race horse which is more than 12 years old at the time it is placed in service, 3 years.

“(C) Semi-Conductor manufacturing equipment—In the case of any semi-conductor manufacturing equipment, the recovery period is 5 years.

“(D) Qualified technological equipment—In the case of any qualified technological equipment, the recovery period is 5 years.

“(E) Automobile or light general purpose truck—In the case of any automobile or light general purpose truck, the recovery period is 5 years.

“(F) Qualified rent-to-own property—In the case of any qualified rent-to-own property, the recovery period is 9 years.

“(G) Certain telephone switching equipment—In the case of any computer-based telephone central office switching equipment, the recovery period is 9.5 years.

“(H) Railroad track—In the case of any railroad track, the recovery period is 10 years.

“(I) Smart electric distribution property—In the case of qualified smart electric meters and qualified smart electric grid systems, the recovery period is 10 years.

“(J) Airplanes—In the case of any fixed-wing aircraft (including any fixed-wing airframe or engine), the recovery period is 12 years.

“(K) Natural gas gathering line—In the case of any natural gas gathering line, the recovery period is 14 years.

“(L) Tree or vine bearing fruit or nuts—In the case of any tree or vine bearing fruit or nuts, the recovery period is 20 years.

“(M) Telephone distribution plant—In the case of any telephone distribution plant and comparable equipment used for 2-way exchange of voice and data communications by cable, the recovery period is 24 years.

“(N) Real property—In the case of nonresidential real property, residential rental property, and any section 1245 property (as defined in section 1245(a)(3)) which is real property with no class life, the recovery period is 40 years.

“(O) Water treatment and utility property—In the case of any municipal wastewater treatment plant or water utility property, the recovery period is 50 years.

“(P) Clearing and grading improvements; tunnel bore—In the case of any clearing and grading land improvements or tunnel bore, the recovery period is 50 years.

“(Q) Tax-exempt use property subject to lease—In the case of any tax-exempt use property subject to a lease, the recovery period used for purposes of paragraph (2) shall (notwithstanding any other subparagraph of this paragraph) in no event be less than 125 percent of the lease term.”

“(i) Neutral cost recovery system

“(1) In general—In the case of any property (to which this section applies) placed in service by the taxpayer in a taxable year for which such taxpayer has elected the application of this subsection, the deduction determined under subsection (a) with respect to such property for any taxable year shall be increased by an amount equal to the product of—

“(A) the modified adjusted basis of such property determined as of the close of such taxable year (determined without regard to this subsection but after taking all other adjustments for such taxable year into account), multiplied by

“(B) the inflation adjustment percentage for the calendar year in which such taxable year begins.

“(2) Modified adjusted basis—For purposes of this subsection, the term “modified adjusted basis” means, with respect to any property, the adjusted basis which would be determined with respect to such property if this subsection never applied to such property.

“(3) Inflation adjustment percentage—For purposes of this subsection, the term “inflation adjustment percentage” means, with respect to any calendar year, the cost-of-living adjustment which would be determined under section 1(c)(2)(A) for such calendar year if clause (ii) thereof were applied by substituting “the C-CPI-U for the calendar year preceding the calendar year referred to in clause (i)” for “the normalized CPI for calendar year 2012”.

“(4) Increase for first taxable year reduced to take into account placed in service convention—In the case of the taxable year in which any property is placed in service, the increase determined under paragraph (1) with respect to such property shall be equal to—

“(A) in the case of any property to which subsection (d)(3) applies, 1/8 of the amount of such increase determined without regard to this paragraph, and

“(B) in the case of any other property, 1/2 of the amount of such increase determined without regard to this paragraph.

“(5) Overall depreciation allowance not to exceed basis—The deduction determined under subsection (a) (after any increase determined under this subsection) with respect to any property for any taxable year shall not exceed the adjusted basis of such property determined as of the beginning of such taxable year.

“(6) Certain property excluded—Paragraph (1) shall not apply to any specified property used outside the United States or to any property described in subsection (d)(2).

“(7) Election

“(A) In general—An election under paragraph (1) for any taxable year shall be made not later than the due date (including extensions) for the return of tax for such taxable year. Such election, once made, shall be irrevocable. Such election shall apply with respect to all property placed in service during the taxable for which made (and shall apply for subsequent taxable years but only with respect to such property).

“(B) Taxpayer engaged in more than one business—A taxpayer engaged in more than one trade or business may make separate elections under paragraph (1) with respect to each such trade or business.”

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

“(1) Class life

“(A) In general—Except as provided in this section, the term “class life” means the class life (if any) which would be applicable with respect to any property as of January 1, 1986, under subsection (m) of section 167 (determined without regard to paragraph (4) and as if the taxpayer had made an election under such subsection). The reference in this paragraph to subsection (m) of section 167 shall be treated as a reference to such subsection as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990.

“(B) Secretarial authority to modify Rev. Proc. 87–56

“(i) In general—The Secretary, through the Office of Tax Analysis and in consultation with the Bureau of Economic Analysis of the Department of Commerce, shall—

“(I) determine, and develop a schedule of, the economic depreciation of the major categories of depreciable property (other than property with a specified class life under subsection (c)(2)) to approximate constant straight-line depreciation, and

“(II) develop recommendations regarding the proper economic depreciation for property with a specified class life under subsection (c)(2).

“(ii) Report—Not later than December 31, 2017, the Secretary shall submit to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate—

“(I) the schedule developed under clause (i)(I), and

“(II) the recommendations developed under clause (i)(II).

“(2) Residential rental property

“(A) In general—The term “residential rental property” means any building or structure if 80 percent or more of the gross rental income from such building or structure for the taxable year is rental income from dwelling units.

“(B) Dwelling unit—For purposes of subparagraph (A)—

“(i) the term “dwelling unit” means a house or apartment used to provide living accommodations in a building or structure, but does not include a unit in a hotel, motel, or other establishment more than one-half of the units in which are used on a transient basis, and

“(ii) if any portion of the building or structure is occupied by the taxpayer, the gross rental income from such building or structure shall include the rental value of the portion so occupied.

“(3) Nonresidential real property—The term “nonresidential real property” means section 1250 property which is not—

“(A) residential rental property, or

“(B) property with a class life of less than 27.5 years.

“(4) Water utility property—The term “water utility property” means property—

“(A) which is an integral part of the gathering, treatment, or commercial distribution of water, and

“(B) any municipal sewer.

“(5) Qualified rent-to-own property

“(A) In general—The term “qualified rent-to-own property” means any property held by a rent-to-own dealer for purposes of being subject to a rent-to-own contract.

“(B) Rent-to-own dealer—The term “rent-to-own dealer” means a person that, in the ordinary course of business, regularly enters into rent-to-own contracts with customers for the use of consumer property, if a substantial portion of those contracts terminate and the property is returned to such person before the receipt of all payments required to transfer ownership of the property from such person to the customer.

“(C) Consumer property—The term “consumer property” means tangible personal property of a type generally used within the home for personal use.

“(D) Rent-to-own contract—The term “rent-to-own contract” means any lease for the use of consumer property between a rent-to-own dealer and a customer who is an individual which—

“(i) is titled “Rent-to-Own Agreement” or “Lease Agreement with Ownership Option”, or uses other similar language,

“(ii) provides for level (or decreasing where no payment is less than 40 percent of the largest payment), regular periodic payments (for a payment period which is a week or month),

“(iii) provides that legal title to such property remains with the rent-to-own dealer until the customer makes all the payments described in clause (ii) or early purchase payments required under the contract to acquire legal title to the item of property,

“(iv) provides a beginning date and a maximum period of time for which the contract may be in effect that does not exceed 156 weeks or 36 months from such beginning date (including renewals or options to extend),

“(v) provides for payments within the 156-week or 36-month period that, in the aggregate, generally exceed the normal retail price of the consumer property plus interest,

“(vi) provides for payments under the contract that, in the aggregate, do not exceed $10,000 per item of consumer property,

“(vii) provides that the customer does not have any legal obligation to make all the payments referred to in clause (ii) set forth under the contract, and that at the end of each payment period the customer may either continue to use the consumer property by making the payment for the next payment period or return such property to the rent-to-own dealer in good working order, in which case the customer does not incur any further obligations under the contract and is not entitled to a return of any payments previously made under the contract, and

“(viii) provides that the customer has no right to sell, sublease, mortgage, pawn, pledge, encumber, or otherwise dispose of the consumer property until all the payments stated in the contract have been made.

“(6) Qualified technological equipment

“(A) In general—The term “qualified technological equipment” means—

“(i) any computer or peripheral equipment,

“(ii) any high technology telephone station equipment installed on the customer’s premises, and

“(iii) any high technology medical equipment.

“(B) Computer or peripheral equipment defined—For purposes of this paragraph—

“(i) In general—The term “computer or peripheral equipment” means—

“(I) any computer, and

“(II) any related peripheral equipment.

“(ii) Computer—The term “computer” means a programmable electronically activated device which—

“(I) is capable of accepting information, applying prescribed processes to the information, and supplying the results of these processes with or without human intervention, and

“(II) consists of a central processing unit containing extensive storage, logic, arithmetic, and control capabilities.

“(C) High technology medical equipment—For purposes of this paragraph, the term “high technology medical equipment” means any electronic, electromechanical, or computer-based high technology equipment used in the screening, monitoring, observation, diagnosis, or treatment of patients in a laboratory, medical, or hospital environment.

“(7) Natural gas gathering line—The term “natural gas gathering line” means—

“(A) the pipe, equipment, and appurtenances determined to be a gathering line by the Federal Energy Regulatory Commission, and

“(B) the pipe, equipment, and appurtenances used to deliver natural gas from the wellhead or a commonpoint to the point at which such gas first reaches—

“(i) a gas processing plant,

“(ii) an interconnection with a transmission pipeline for which a certificate as an interstate transmission pipeline has been issued by the Federal Energy Regulatory Commission,

“(iii) an interconnection with an intrastate transmission pipeline, or

“(iv) a direct interconnection with a local distribution company, a gas storage facility, or an industrial consumer.

“(8) Qualified smart electric meters

“(A) In general—The term “qualified smart electric meter” means any smart electric meter which—

“(i) is placed in service by a taxpayer that is a supplier of electric energy or a provider of electric energy services, and

“(ii) does not have a class life (determined without regard to subsection (c)) of less than 10 years.

“(B) Smart electric meter—For purposes of subparagraph (A), the term “smart electric meter” means any time-based meter and related communication equipment which is capable of being used by the taxpayer as part of a system that—

“(i) measures and records electricity usage data on a time-differentiated basis in at least 24 separate time segments per day,

“(ii) provides for the exchange of information between supplier or provider and the customer’s electric meter in support of time-based rates or other forms of demand response,

“(iii) provides data to such supplier or provider so that the supplier or provider can provide energy usage information to customers electronically, and

“(iv) provides net metering.

“(9) Qualified smart electric grid systems

“(A) In general—The term “qualified smart electric grid system” means any smart grid property which—

“(i) is used as part of a system for electric distribution grid communications, monitoring, and management placed in service by a taxpayer who is a supplier of electric energy or a provider of electric energy services, and

“(ii) does not have a class life (determined without regard to subsection (c)) of less than 10 years.

“(B) Smart grid property—For the purposes of subparagraph (A), the term “smart grid property” means electronics and related equipment that is capable of—

“(i) sensing, collecting, and monitoring data of or from all portions of a utility’s electric distribution grid,

“(ii) providing real-time, two-way communications to monitor or manage such grid, and

“(iii) providing real time analysis of and event prediction based upon collected data that can be used to improve electric distribution system reliability, quality, and performance.

“(10) Specified property used outside the United States

“(A) In general—The term “specified property used outside the United States” means—

“(i) any aircraft which is registered by the Administrator of the Federal Aviation Agency and which is operated to and from the United States or is operated under contract with the United States,

“(ii) rolling stock which is used within and without the United States and which is—

“(I) of a rail carrier subject to part A of subtitle IV of title 49, or

“(II) of a United States person (other than a corporation described in subclause (I)) but only if the rolling stock is not leased to one or more foreign persons for periods aggregating more than 12 months in any 24-month period,

“(iii) any vessel documented under the laws of the United States which is operated in the foreign or domestic commerce of the United States,

“(iv) any motor vehicle of a United States person (as defined in section 7701(a)(30)) which is operated to and from the United States,

“(v) any container of a United States person which is used in the transportation of property to and from the United States,

“(vi) any property (other than a vessel or an aircraft) of a United States person which is used for the purpose of exploring for, developing, removing, or transporting resources from the outer Continental Shelf (within the meaning of section 2 of the Outer Continental Shelf Lands Act, as amended and supplemented (43 U.S.C. 1331)),

“(vii) any property which is owned by a domestic corporation or by a United States citizen (other than a citizen entitled to the benefits of section 931 or 933) and which is used predominantly in a possession of the United States by such a corporation, or such a citizen, or by a corporation created or organized in, or under the law of, a possession of the United States,

“(viii) any communications satellite (as defined in section 103(3) of the Communications Satellite Act of 1962, 47 U.S.C. 702(3)), or any interest therein, of a United States person,

“(ix) any cable, or any interest therein, of a domestic corporation engaged in furnishing telephone service to which section 168(e)(10)(C) applies (or of a wholly owned domestic subsidiary of such a corporation), if such cable is part of a submarine cable system which constitutes part of a communication link exclusively between the United States and one or more foreign countries,

“(x) any property (other than a vessel or an aircraft) of a United States person which is used in international or territorial waters within the northern portion of the Western Hemisphere for the purpose of exploring for, developing, removing, or transporting resources from ocean waters or deposits under such waters,

“(xi) any property described in section 48(l)(3)(A)(ix) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) which is owned by a United States person and which is used in international or territorial waters to generate energy for use in the United States, and

“(xii) any satellite (not described in clause (viii)) or other spacecraft (or any interest therein) held by a United States person if such satellite or other spacecraft was launched from within the United States.

“(B) Northern portion of the Western Hemisphere—For purposes of subparagraph (A)(x), the term “northern portion of the Western Hemisphere” means the area lying west of the 30th meridian west of Greenwich, east of the international dateline, and north of the Equator, but not including any foreign country which is a country of South America.”

“173. Circulation expenditures

“(a) In general—In the case of a taxpayer’s specified circulation expenditures—

“(1) except as provided in paragraph (2), no deduction shall be allowed for such expenditures, and

“(2) the taxpayer shall—

“(A) charge such expenditures to capital account, and

“(B) be allowed an amortization deduction of such expenditures ratably over the 36-month period beginning with the midpoint of the month in which such expenditures are paid or incurred.

“(b) Specified circulation expenditures—For purposes of this section, the term “specified circulation expenditures” means all expenditures (other than expenditures for the purchase of land or depreciable property or for the acquisition of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical) to establish, maintain, or increase the circulation of a newspaper, magazine, or other periodical.

“(c) Treatment upon abandonment—If any property with respect to which specified circulation expenditures are paid or incurred is disposed, retired, or abandoned during the period during which such expenditures are allowed as an amortization deduction under this section, no deduction shall be allowed with respect to such expenditures on account of such disposition, retirement, or abandonment and such amortization deduction shall continue with respect to such expenditures.

“(d) Phase-In for taxable years beginning before 2019

“(1) In general—In the case of specified circulation expenditures paid or incurred in taxable years beginning before 2019—

“(A) notwithstanding subsection (a), the applicable percentage of such expenditures shall be allowed as a deduction for the taxable year in which paid or incurred, and

“(B) subsection (a) shall apply to the remainder of such expenditures.

“(2) Applicable percentage—For purposes of paragraph (1), the applicable percentage shall be determined in accordance with the following table:

“(3) Election out of phase-in—The taxpayer may elect, at such time and in such form and manner as the Secretary shall prescribe, for paragraph (1) not to apply for all taxable years beginning before 2019. Such election, once made, shall be irrevocable.”

“174. Amortization of research and experimental expenditures

“(a) In general—In the case of a taxpayer’s specified research or experimental expenditures for any taxable year—

“(1) except as provided in paragraph (2), no deduction shall be allowed for such expenditures, and

“(2) the taxpayer shall—

“(A) charge such expenditures to capital account, and

“(B) be allowed an amortization deduction of such expenditures ratably over the 5-year period (15-year period in the case of any specified research or experimental expenditures which are attributable to foreign research (within the meaning of section 41(d)(4)(F))) beginning with the midpoint of the taxable year in which such expenditures are paid or incurred.

“(b) Specified research or experimental expenditures—For purposes of this section, the term “specified research or experimental expenditures” means, with respect to any taxable year, research or experimental expenditures which are paid or incurred by the taxpayer during such taxable year in connection with the taxpayer’s trade or business.

“(c) Special rules

“(1) Land and other property—This section shall not apply to any expenditure for the acquisition or improvement of land, or for the acquisition or improvement of property to be used in connection with the research or experimentation and of a character which is subject to the allowance under section 167 (relating to allowance for depreciation, etc.) or section 611 (relating to allowance for depletion); but for purposes of this section allowances under section 167, and allowances under section 611, shall be considered as expenditures.

“(2) Exploration expenditures—This section shall not apply to any expenditure paid or incurred for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral (including oil and gas).

“(3) Software development—For purposes of this section, any amount paid or incurred in connection with the development of any software shall be treated as a research or experimental expenditure.

“(d) Treatment upon disposition, retirement, or abandonment—If any property with respect to which specified research or experimental expenditures are paid or incurred is disposed, retired, or abandoned during the period during which such expenditures are allowed as an amortization deduction under this section, no deduction shall be allowed with respect to such expenditures on account of such disposition, retirement, or abandonment and such amortization deduction shall continue with respect to such expenditures.

“(e) Special rules for expenditures for domestic research during taxable years beginning before 2021

“(1) In general—In the case of domestic research or experimental expenditures paid or incurred during any taxable year beginning before 2021—

“(A) notwithstanding subsection (a), the applicable percentage of such expenditures shall be allowed as a deduction in the taxable year in which paid or incurred, and

“(B) subsection (a) shall apply to the remainder of such expenditures by substituting the applicable period for “the 5-year period”.

“(2) Domestic research or experimental expenditures—For purposes of this subsection, the term “domestic research or experimental expenditures” means any expenditures—

“(A) to which subsection (a) applies (determined without regard to this subsection), and

“(B) which are not attributable to foreign research (within the meaning of section 41(d)(4)(F)).

“(3) Applicable percentage—For purposes of this subsection, the applicable percentage shall be determined in accordance with the following table:

“(4) Applicable period—For purposes of this subsection, the applicable period shall be determined in accordance with the following table:

“(5) Election out of phase-in—The taxpayer may elect, at such time and in such form and manner as the Secretary shall prescribe, for paragraph (1) not to apply to all domestic research or experimental expenditures of the taxpayer for any taxable years beginning before 2021. Such election, once made, shall be irrevocable.”

“177. Amortization of certain advertising expenses

“(a) In general—In the case of a taxpayer’s amortizable advertising expenses for any taxable year—

“(1) except as provided in paragraph (2), no deduction shall be allowed for such expenses, and

“(2) the taxpayer shall—

“(A) charge such expenses to capital account, and

“(B) be allowed an amortization deduction of such expenses ratably over the 10-year period beginning with the midpoint of the taxable year in which such expenses are paid or incurred.

“(b) Exemption

“(1) In general—So much of the taxpayer’s otherwise deductible advertising expenses for any taxable year as do not exceed $1,000,000 shall not be taken into account in determining such taxpayer’s amortizable advertising expenses for such taxable year.

“(2) Phaseout of exemption—In the case of a taxpayer whose otherwise deductible advertising expenses for any taxable year exceed $1,500,000, the dollar amount in effect under paragraph (1) with respect to such taxpayer for such taxable year shall be reduced (but not below zero) by twice such excess.

“(3) Aggregation; short taxable years—For purposes of this subsection, rules similar to the rules of paragraphs (2) and (3)(B) of section 448(b) shall apply.

“(c) Amortizable advertising expenses

“(1) In general—For purposes of this section, the term “amortizable advertising expenses” means, with respect to any taxpayer for any taxable year, the applicable percentage of the taxpayer’s otherwise deductible advertising expenses for such taxable year.

“(2) Applicable percentage—For purposes of this subsection, the term “applicable percentage” means (with respect to the taxpayer’s otherwise deductible advertising expenses for any taxable year) the percentage determined in accordance with the following table:

“(3) Election out of phase-in—The taxpayer may elect, at such time and in such form and manner as the Secretary shall prescribe, to treat the applicable percentage as being equal to 50 percent for all taxable years beginning before 2018. Such election, once made, shall be irrevocable.

“(d) Otherwise deductible advertising expenses—For purposes of this section—

“(1) In general—The term “otherwise deductible advertising expenses” means, with respect to any taxpayer for any taxable year, the deductions which would (but for this section) be allowable to the taxpayer for such taxable year with respect to specified advertising expenses.

“(2) Specified advertising expenses—The term “specified advertising expenses” means any amount paid or incurred for the development, production, or placement (including any form of transmission, broadcast, publication, display, or distribution) of any communication to the general public (or portions thereof) which is intended to promote the taxpayer or a trade or business of the taxpayer (or any service, facility, or product provided pursuant to such trade or business).

“(3) Exceptions—The term “specified advertising expenses” shall not include—

“(A) Certain wages—Wages paid or incurred to any employee unless the services rendered by such employee are primarily related to—

“(i) an activity described in paragraph (2) (other than the direct sale of goods or services to customers of the taxpayer), or

“(ii) the direct supervision of employees rendering services primarily related to such an activity.

“(B) Depreciation of tangible property—In the case of any tangible property, any amount for which a deduction is allowed for depreciation under section 167.

“(C) Amortizable section 197 intangibles—Any amount for which a deduction is allowed for amortization under section 197.

“(D) Discounts, etc—Any discount, coupon, rebate, slotting allowance, sample, prize, loyalty reward point, or any item determined by the Secretary to be similar to any of the foregoing (other than any amount paid or incurred to promote any of the foregoing).

“(E) Certain communications on taxpayer’s property—Any amount paid or incurred with respect to any communication appearing on tangible property of the taxpayer which—

“(i) is of a character subject to the allowance for depreciation, or

“(ii) is properly treated as inventory for purposes of section 471.

“(F) Creation of logos, trade names, etc—Any amount paid or incurred for the creation of any logo, trademark, or trade name.

“(G) Package design—Any amount to which section 263A(i) applies.

“(H) Marketing research—Any amount paid or incurred for marketing research.

“(I) Business meals—Any amount paid or incurred for meals.

“(J) Qualified sponsorship payments—Any amount paid or incurred as a qualified sponsorship payment (as defined in section 513(i)(2)) with respect to an organization subject to the tax imposed by section 511.

“(e) Treatment upon abandonment—If any property with respect to which specified advertising expenses are paid or incurred is disposed, retired, or abandoned during the period during which such expenses are allowed as an amortization deduction under this section, no deduction shall be allowed with respect such expenses on account of such disposition, retirement, or abandonment and such amortization deduction shall continue with respect to such expenses.

“(f) Inflation adjustment

“(1) In general—In the case of any taxable year beginning after 2015, each of the dollar amounts in subsection (b) shall 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 such calendar year, determined by substituting “calendar year 2014” for “calendar year 2012” in clause (ii) thereof.

“(2) Rounding—The amount of any increase under paragraph (1) shall be rounded to the nearest multiple of $10,000.”

“(i) Capitalization of package design expenses—For purposes of this section, in the case of any amount paid or incurred for package design, such amounts shall be treated as an indirect cost described in subsection (a)(2)(B) with respect to packages which utilize such design.”

“(6) Inflation adjustment

“(A) In general—In the case of any taxable year beginning after 2014, the dollar amounts in paragraphs (1) and (2) shall each be increased by an amount equal to—

“(i) such dollar amount, multiplied by

“(ii) the cost-of-living adjustment determined under section 1(c)(2)(A) for such calendar year, determined by substituting “calendar year 2013” for “calendar year 2012” in clause (ii) thereof.

“(B) Rounding—The amount of any increase under subparagraph (A) shall be rounded to the nearest multiple of $10,000.”

“(a) In general—In the case of a taxpayer’s qualified reforestation expenditures for any taxable year—

“(1) except as provided in paragraph (2), no deduction shall be allowed for such expenditures, and

“(2) the taxpayer shall—

“(A) charge such expenditures to capital account, and

“(B) be allowed an amortization deduction of such expenditures ratably over the 7-year period beginning with the midpoint of the taxable year in which such expenditures are paid or incurred.”

“(1) Qualified reforestation expenditures—The term “qualified reforestation expenditures” means, with respect to any taxable year, the reforestation expenditures paid or incurred by the taxpayer during such taxable year with respect to qualified timber property.”

“(2) Qualified timber property—The term “qualified timber property” means a woodlot or other site located in the United States which—

“(A) will contain evergreen trees in significant commercial quantities which are reasonably expected to be more than 6 years old at the time severed from the roots, and

“(B) is held by the taxpayer for the planting, cultivating, caring for, and cutting of such trees for sale for ornamental purposes.”

“(a) In general—In the case of a taxpayer’s qualified environmental remediation expenditures for any taxable year—

“(1) except as provided in paragraph (2), no deduction shall be allowed for such expenditures, and

“(2) the taxpayer shall—

“(A) charge such expenditures to capital account, and

“(B) be allowed an amortization deduction of such expenditures ratably over the 40-year period beginning with the midpoint of the taxable year in which such expenditures are paid or incurred.”

“(3) Organizational expenditures—The term “organizational expenditures” means any expenditure which—

“(A) is incident to the creation of a corporation or a partnership,

“(B) is chargeable to capital account, and

“(C) is of a character which, if expended incident to the creation of a corporation or a partnership having a limited life, would be amortizable over such life.”

“(B) the remainder of such start-up and organizational expenditures shall be charged to capital account and allowed as an amortization deduction determined by amortizing such expenditures ratably over the 15-year period beginning with the midpoint of the taxable year in which the active trade or business begins.”

“(d) Amount of gain where loss previously disallowed

“(1) In general—If—

“(A) in the case of a sale or exchange of property to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection (a)(1), and

“(B) the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in the taxpayer’s hands is determined directly or indirectly by reference to such property) at a gain,

“(2) Exception for wash sales—Paragraph (1) shall not apply if the loss sustained by the transferor is not allowable to the transferor as a deduction by reason of section 1091 (relating to wash sales).

“(3) Exception for transfers from tax indifferent parties—Paragraph (1) shall not apply to the extent any loss sustained by the transferor (if allowed) would not be taken into account in determining a tax imposed under section 1 or 11 or a tax computed as provided by either of such sections.”

“(a) Entertainment, amusement, or recreation

“(1) In general—No deduction otherwise allowable under this chapter shall be allowed for amounts paid or incurred for any of the following items:

“(A) Activity—With respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation.

“(B) Membership dues—With respect to membership in any club organized for business, pleasure, recreation or other social purposes.

“(C) Amenity—With respect to a de minimis fringe (as defined in section 132(e)(1)) that is primarily personal in nature and involving property or services that are not directly related to the taxpayer’s trade or business.

“(D) Facility—With respect to a facility or portion thereof used in connection with an activity referred to in subparagraph (A), membership dues or similar amounts referred to in subparagraph (B), or an amenity referred to in subparagraph (C).

“(E) Qualified transportation fringe and parking facility—Which is a qualified transportation fringe (as defined in section 132(f)) or which is a parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)).

“(2) Special rules—For purposes of applying paragraph (1), an activity described in section 212 shall be treated as a trade or business.

“(3) Regulations—Under the regulations prescribed to carry out this section, the Secretary shall include regulations—

“(A) defining entertainment, amenities, recreation, amusement, and facilities for purposes of this subsection,

“(B) providing for the appropriate allocation of depreciation and other costs with respect to facilities used for parking, and

“(C) specifying arrangements a primary purpose of which is the avoidance of this subsection.”

“(3) Reimbursed expenses

“(A) In general—Expenses paid or incurred by the taxpayer, in connection with the performance by him of services for another person (whether or not such other person is the taxpayer’s employer), under a reimbursement or other expense allowance arrangement with such other person, but this paragraph shall apply—

“(i) where the services are performed for an employer, only if the employer has not treated such expenses in the manner provided in paragraph (2), or

“(ii) where the services are performed for a person other than an employer, only if the taxpayer accounts (to the extent provided by subsection (d)) to such person.

“(B) Exception—Except as provided by the Secretary, subparagraph (A) shall not apply—

“(i) in the case of an arrangement in which the person other than the employer is an entity described in section 168(g)(2)(A), or

“(ii) to any other arrangement designated by the Secretary as having the effect of avoiding the limitation under subparagraph (A).”

“(n) Limitation on certain expenses

“(1) In general—The amount allowable as a deduction under this chapter for any expense for food or beverages (pursuant to subsection (e)(1)) or business meals (pursuant to subsection (k)(1)) shall not exceed 50 percent of the amount of such expense or item which would (but for this paragraph) be allowable as a deduction under this chapter.

“(2) Exceptions—Paragraph (1) shall not apply to any expense if—

“(A) such expense is described in paragraph (2), (3), (6), (7), or (8) of subsection (e),

“(B) in the case of an expense for food or beverages, such expense is excludable from the gross income of the recipient under section 132 by reason of subsection (e) thereof (relating to de minimis fringes) or under section 119 (relating to meals and lodging furnished for convenience of employer), or

“(C) in the case of an employer who pays or reimburses moving expenses of an employee, such expenses are includible in the income of the employee under section 82.

“(3) Special rule for individuals subject to Federal hours of service—In the case of any expenses for food or beverages consumed while away from home (within the meaning of section 162(a)(2)) by an individual during, or incident to, the period of duty subject to the hours of service limitations of the Department of Transportation, paragraph (1) shall be applied by substituting “80 percent” for “50 percent”.”

“280E. Expenditures in connection with illegal businesses

“No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if—

“(1) such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted, or

“(2) the carrying out of such trade or business is a felony under Federal law or the law of any State in which such trade or business is conducted.”

“(q) Disallowance of FDIC premiums paid by certain large financial institutions

“(1) In general—No deduction shall be allowed for the applicable percentage of any FDIC premium paid or incurred by the taxpayer.

“(2) Exception for small institutions—Paragraph (1) shall not apply to any taxpayer for any taxable year if the total consolidated assets of such taxpayer (determined as of the close of such taxable year) do not exceed $10,000,000,000.

“(3) Applicable percentage—For purposes of this subsection, the term “applicable percentage” means, with respect to any taxpayer for any taxable year, the ratio (expressed as a percentage but not greater than 100 percent) which—

“(A) the excess of—

“(i) the total consolidated assets of such taxpayer (determined as of the close of such taxable year), over

“(ii) $10,000,000,000, bears to

“(B) $40,000,000,000.

“(4) FDIC premiums—For purposes of this subsection, the term “FDIC premium” means any assessment imposed under section 7(b) of the Federal Deposit Insurance Act (12 U.S.C. 1817(b)).

“(5) Total consolidated assets—For purposes of this subsection, the term “total consolidated assets” has the meaning given such term under section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (12 U.S.C. 5365).

“(6) Aggregation rule

“(A) In general—Members of an expanded affiliated group shall be treated as a single taxpayer for purposes of applying this subsection.

“(B) Expanded affiliated group—For purposes of this paragraph, the term “expanded affiliated group” means an affiliated group as defined in section 1504(a), determined—

“(i) by substituting “more than 50 percent” for “at least 80 percent” each place it appears, and

“(ii) without regard to paragraphs (2) and (3) of section 1504(b).”

“(a) In general—Except as otherwise provided in this section, if section 1250 property is disposed of after December 31, 2014, the amount of gain with respect to such property which is treated as ordinary income shall be an amount equal to the lesser of—

“(1) the sum of—

“(A) the amount of additional depreciation attributable to periods before January 1, 2015, in respect of such property, and

“(B) the amount of depreciation adjustments attributable to periods after December 31, 2014, in respect of such property, or

“(2) the excess of the amount realized (or, in the case of a disposition other than a sale, exchange, or involuntary conversion, the fair market value of such property), over the adjusted basis of such property.”

“(e) Application of section—This section shall not apply to any energy property placed in service after December 31, 2016.”

“448. Limitation on use of cash method of accounting

“(a) In general—The cash receipts and disbursements method of accounting may only be used by—

“(1) a natural person,

“(2) a farming business, and

“(3) any other entity which meets the gross receipts test of subsection (b) for the taxable year.

“(b) Gross receipts test—For purposes of this section—

“(1) In general—An entity meets the gross receipts test of this subsection for any taxable year if the average annual gross receipts of such entity for the 3-taxable-year period ending with the taxable year which precedes such taxable year does not exceed $10,000,000.

“(2) Aggregation rules—All persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (m) or (o) of section 414 shall be treated as one entity for purposes of paragraph (1).

“(3) Special rules—For purposes of this subsection—

“(A) Not in existence for entire 3-year period—If the entity was not in existence for the entire 3-year period referred to in paragraph (1), such paragraph shall be applied on the basis of the period during which such entity (or trade or business) was in existence.

“(B) Short taxable years—Gross receipts for any taxable year of less than 12 months shall be annualized by multiplying the gross receipts for the short period by 12 and dividing the result by the number of months in the short period.

“(C) Gross receipts—Gross receipts for any taxable year shall be reduced by returns and allowances made during such year.

“(D) Treatment of predecessors—Any reference in this subsection to an entity shall include a reference to any predecessor of such entity.

“(c) Farming business—For purposes of this section—

“(1) In general—The term “farming business” means the trade or business of farming.

“(2) Certain trades and businesses included

“(A) In general—The term “farming business” shall include the trade or business of—

“(i) operating a nursery or sod farm, or

“(ii) the raising or harvesting of trees bearing fruit, nuts, or other crops, or ornamental trees.

“(B) Certain evergreen trees not treated as ornamental—For purposes of subparagraph (A)(ii), an evergreen tree which is more than 6 years old at the time severed from the roots shall not be treated as an ornamental tree.

“(d) Tax shelter defined—For purposes of this section, the term “tax shelter” has the meaning given such term by section 461(i)(2) (determined after application of paragraph (3) thereof). An S corporation shall not be treated as a tax shelter for purposes of this section merely by reason of being required to file a notice of exemption from registration with a State agency described in section 461(i)(2)(A), but only if there is a requirement applicable to all corporations offering securities for sale in the State that to be exempt from such registration the corporation must file such a notice.

“(e) Special rules—For purposes of this section—

“(1) Coordination with section 481—In the case of any person required by this section to change its method of accounting for any taxable year—

“(A) such change shall be treated as initiated by such person, and

“(B) such change shall be treated as made with the consent of the Secretary.

“(2) Use of related parties, etc—The Secretary shall prescribe such regulations as may be necessary to prevent the use of related parties, pass-thru entities, or intermediaries to avoid the application of this section.”

“(g) Rules for treating accounting method as adopted by taxpayer—If the taxpayer uses a method of accounting with respect to any item on any return of tax—

“(1) in the case of any method of accounting which the taxpayer is permitted to use with respect to such item, such method shall be treated as having been adopted by the taxpayer with respect to such item, and

“(2) in the case of any method of accounting which the taxpayer is not permitted to use with respect to such item, such method shall be treated as having been adopted by the taxpayer with respect to such item if the taxpayer used the same method with respect to such item on the return of tax for the preceding taxable year.”

“(b) Inclusion not later than for financial accounting purposes

“(1) In general—In the case of a taxpayer the taxable income of which is computed under the accrual method of accounting, the amount of any portion of any item of income shall be included in gross income not later than the taxable year with respect to which such amount is taken into account as income in—

“(A) an audited financial statement of the taxpayer described in section 1221(b)(3)(B), or

“(B) such other financial statement as the Secretary may specify for purposes of this subsection.

“(2) Coordination with special rules for long-term contracts—Paragraph (1) shall not apply with respect to any item of income to which section 460 applies.”

“(c) Treatment of advance payments

“(1) In general—A taxpayer which computes taxable income under the accrual method of accounting, and receives any advance payment during the taxable year, shall—

“(A) except as provided in subparagraph (B), include such advance payment in gross income for such taxable year, or

“(B) if the taxpayer elects the application of this subparagraph with respect to the category of advance payments to which such advance payment belongs, the taxpayer shall—

“(i) to the extent that any portion of such advance payment is required under subsection (b) to be included in gross income in the taxable year in which such payment is received, so include such portion, and

“(ii) include the remaining portion of such advance payment in gross income in the taxable year following the taxable year in which such payment is received.

“(2) Election

“(A) In general—Except as otherwise provided in this paragraph, the election under paragraph (1)(B) shall be made at such time, in such form and manner, and with respect to such categories of advance payments, as the Secretary may provide.

“(B) Period to which election applies—An election under paragraph (1)(B) shall be effective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to revoke such election. For purposes of this title, the computation of taxable income under an election made under paragraph (1)(B) shall be treated as a method of accounting.

“(3) Advance payment—For purposes of this subsection—

“(A) In general—The term “advance payment” means any payment—

“(i) the full inclusion of which in the gross income of the taxpayer for the taxable year of receipt is a permissible method of accounting under this section (determined without regard to this subsection), and

“(ii) which is for goods, services, or such other items as may be identified by the Secretary for purposes of this clause.

“(B) Exclusions—Except as otherwise provided by the Secretary, such term shall not include—

“(i) rent,

“(ii) insurance premiums,

“(iii) payments with respect to financial instruments,

“(iv) payments with respect to warranty or guarantee contracts under which a third party is the primary obligor,

“(v) payments subject to section 871(a), 881, 1441, or 1442,

“(vi) payments in property to which section 83 applies, and

“(vii) any other payment identified by the Secretary for purposes of this subparagraph.”

“(l) Dealer dispositions—For purposes of subsection (b)(2)(A), the term “dealer disposition” means any of the following dispositions:

“(1) Personal property—Any disposition of personal property by a person who regularly sells or otherwise disposes of personal property of the same type on the installment plan.

“(2) Real property—Any disposition of real property which is held by the taxpayer for sale to customers in the ordinary course of the taxpayer’s trade or business.”

“(1) Exception for certain construction contracts—Subsections (a), (b), and (c)(1) and (2) shall not apply to any construction contract entered into by a taxpayer—

“(A) who estimates (at the time such contract is entered into) that such contract will be completed within the 2-year period beginning on the contract commencement date of such contract, and

“(B) whose average annual gross receipts for the 3 taxable years preceding the taxable year in which such contract is entered into do not exceed $10,000,000.”

“(C) if any distribution is made from the Fund during such taxable year which is not used as provided in subsection (e)(4), the balance of the Fund determined immediately before such distribution.”

“(c) Last-In, first-Out method not permissible—The last-in, first-out method of determining inventories shall in no event be treated as clearly reflecting income.”

“(d) Lower of cost or market method not permissible—The lower of cost or market method of determining inventories shall in no event be treated as clearly reflecting income. For purposes of the preceding sentence, the lower of cost or market shall include the lower of cost or bona fide net selling price.”

“(2) Property acquired for resale—Real or personal property described in section 1221(a)(1) which is acquired by the taxpayer for resale.

“(3) Exception for taxpayer with gross receipts of $10,000,000 or less—This section shall not apply to any property produced or acquired by the taxpayer during any taxable year if the average annual gross receipts of the taxpayer (or any predecessor) for the 3-taxable year period ending with the taxable year preceding such taxable year do not exceed $10,000,000. For purposes of this paragraph, rules similar to the rules of paragraphs (2) and (3) of section 448(b) shall apply.

“(4) Films, sound recordings, books, etc—For purposes of this subsection, the term “tangible personal property” shall include a film, sound recording, video tape, book, or similar property.”

“(7) Treatment of participations and residuals

“(A) In general—In the case of any participation or residual with respect to any property to which this subsection applies (including any property to which section 168 applies by reason of paragraph (8)), the taxpayer—

“(i) shall exclude such participation or residual from the adjusted basis of such property, and

“(ii) shall be allowed a deduction for such participation or residual in the taxable year in which such participation or residual is paid.

“(B) Participations and residuals—For purposes of this paragraph, the term “participation or residual” means, with respect to any property, any cost the amount of which by contract varies with the amount of income earned in connection with such property.”

“(8) Election to utilize 20-year straight line recovery—If the taxpayer elects the application of this paragraph for any taxable year, the depreciation deduction allowable with respect to any property placed in service by the taxpayer during such taxable year which would otherwise be determined under paragraph (1) shall be determined under section 168—

“(A) by treating the straight line method as the applicable depreciation method, and

“(B) by treating 20 years as the applicable recovery period.”

“91. Patent or trademark infringement awards

“(a) In general—Except as provided in subsection (b), any payment received for infringement of any patent or trademark (whether by reason of judgment or settlement) shall be included in gross income as ordinary income.

“(b) Impairment of capital—If the taxpayer demonstrates to the satisfaction of the Secretary that a payment described in subsection (a) constitutes damages received by reason of the reduction in value of property of the taxpayer caused by the infringement referred to in subsection (a)—

“(1) the taxpayer’s basis in such property shall be reduced (but not below zero) by the amount of such payment, and

“(2) subsection (a) shall apply to so much of such payment as exceeds the amount of the reduction under paragraph (1).”