Under present law, self-employed individuals are entitled to deduct a portion of the amount paid for health insurance for the self-employed individual and the individual's spouse and dependents. The deduction for health insurance expenses of self-employed individuals is not available for any month in which the taxpayer is eligible to participate in a subsidized health plan maintained by the employer of the taxpayer or the taxpayer's spouse. The deduction is available in the case of self insurance as well as commercial insurance. The self-insured plan must in fact be insurance (e.g., there must be appropriate risk shifting) and not merely a reimbursement arrangement.

The portion of health insurance expenses of self-employed individuals that is deductible is 45 percent for taxable years beginning in 1998 and 1999, 50 percent for taxable years beginning in 2000 and 2001, 60 percent for taxable years beginning in 2002, 80 percent for taxable years beginning in 2003, 2004, and 2005, 90 percent for taxable years beginning in 2006, and 100 percent for taxable years beginning in 2007 and thereafter.

Present law provides that, in lieu of depreciation, a taxpayer with a sufficiently small amount of annual investment may elect to deduct up to $18,500 (for taxable years beginning in 1998) of the cost of qualifying property placed in service for the taxable year (sec. 179). In general, qualifying property is defined as depreciable tangible personal property that is purchased for use in the active conduct of a trade or business. The $18,500 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $200,000. In addition, the amount eligible to be expensed for a taxable year may not exceed the taxable income for a taxable year that is derived from the active conduct of a trade or business (determined without regard to this provision). Any amount that is not allowed as a deduction because of the taxable income limitation may be carried forward to succeeding taxable years (subject to similar limitations).

The 1997 Act included a provision that allows individuals engaged in the trade or business of farming an election to calculate their current year regular income tax liability by averaging, over the prior three-year period, all or a portion of their taxable income attributable to the farming business.

Under the provision, a taxpayer (1) designates all or a portion of the current year income from the farming business as "elected farm income," (2) allocates one-third of the "elected farm income" to each of the prior three taxable years, and (3) determines the current year regular income tax liability by determining the sum of (a) his or her current year income tax liability (without the elected farm income) plus (b) the increases in the income tax liability for each of the three prior taxable years by taking into account the allocable share of the elected farm income for those years.

A cash basis taxpayer includes an item in income at the time of its actual or constructive receipt. If a cash basis taxpayer has an unrestricted right to demand the payment of an amount, the taxpayer is in constructive receipt of that amount whether or not the taxpayer makes the demand and actually receives the payment.

The following tax incentives are available for certain businesses located in empowerment zones: (1) a 20-percent wage credit for the first $15,000 of wages paid to a zone resident who works in the zone; (2) an additional $20,000 of section 179 expensing for "qualified zone property" placed in service by an "enterprise zone business" (accordingly, certain businesses operating in empowerment zones are allowed up to $38,000 of expensing for 1997); (3) special tax-exempt financing for certain zone facilities (described in more detail below); and (4) the so-called "brownfields" tax incentive, which allows taxpayers to expense (rather than capitalize) certain environmental remediation expenditures. (The environmental remediation expenditure must be incurred in connection with the abatement or control of hazardous substances at a qualified contaminated site, generally meaning any property that (1) is held for use in a trade or business, for the production of income, or as inventory; (2) is certified by the appropriate State environmental agency to be located within a targeted area; and (3) contains (or potentially contains) a hazardous substance. Targeted areas include: (1) empowerment zones and enterprise communities as designated under OBRA 1993 and the 1997 Act (including any supplemental empowerment zone designated on December 21, 1994); (2) sites announced before February 1997, as being subject to one of the 76 Environmental Protection Agency (EPA) Brownfields Pilots; (3) any population census tract with a poverty rate of 20 percent or more; and (4) certain industrial and commercial areas that are adjacent to tracts described in (3) above. The "brownfields" provision (enacted in the 1997 Act) applies to eligible expenditures incurred in taxable years ending after date of enactment and before January 1, 2001).

The 95 enterprise communities are eligible for the special tax-exempt financing benefits and "brownfields" tax incentive, but not the other tax incentives (i.e., the wage credit and additional sec. 179 expensing) available in the empowerment zones. In addition to these tax incentives, OBRA 1993 provided that Federal grants would be made to designated empowerment zones and enterprise communities.

The tax incentives (other than the "brownfields" incentive) for empowerment zones and enterprise communities generally will be available during the period that the designation remains in effect (i.e., a 10-year period).

Two additional urban zones with same tax incentives as previously designated empowerment zones.--Pursuant to the Tax Relief Act of 1997 ("1997 Act"), the Secretary of HUD is authorized to designate two additional empowerment zones located in urban areas (thereby increasing to eight the total number of empowerment zones located in urban areas) with respect to which the same tax incentives generally apply (i.e., the wage credit, additional expensing, special tax-exempt financing, and "brownfields" incentive) as are available within the empowerment zones authorized by OBRA 1993. (The wage credit available in the two new urban empowerment zones is modified slightly to provide that the credit rate will be 20 percent for calendar years 2000-2004, 15-percent for calendar year 2005, 10 percent for calendar year 2006, and five percent for calendar year 2007. No wage credit will be available in the two new urban empowerment zones after 2007). The two additional empowerment zones are subject to the same eligibility criteria under present-law section 1392 that apply to the original six urban empowerment zones. (In order to permit designation of these two additional empowerment zones, the 1997 Act increased the aggregate population cap applicable to urban empowerment zones from 750,000 to a cap of one million aggregate population for the eight urban empowerment zones).

The two additional empowerment zones must be designated within 180 days after enactment of the 1997 Act (i.e., the designations must be made by February 1, 1998). However, a special rule provides that the designations of these two additional empowerment zones will not take effect until January 1, 2000 (and generally will remain in effect for 10 years).

20 additional urban and rural empowerment zones.--The 1997 Act also authorizes the Secretaries of HUD and Agriculture to designate an additional 20 empowerment zones (no more than 15 in urban areas and no more than five in rural areas) (In contrast to OBRA 1993, areas located within Indian reservations are eligible for designation as one of the additional 20 empowerment zones under the 1997 Act). With respect to these additional empowerment zones, the present-law eligibility criteria are expanded slightly in comparison to the eligibility criteria provided for by OBRA 1993. First, the general square mileage limitations (i.e., 20 square miles for urban areas and 1,000 square miles for rural areas) are expanded to allow the empowerment zones to include an additional 2,000 acres. This additional acreage, which could be developed for commercial or industrial purposes, is not subject to the poverty rate criteria and may be divided among up to three noncontiguous parcels. In addition, the general requirement that at least half of the nominated area consists of census tracts with poverty rates of 35 percent or more does not apply to the 20 additional empowerment zones. However, under present-law section 1392(a)(4), at least 90 percent of the census tracts within a nominated area must have a poverty rate of 25 percent or more, and the remaining census tracts must have a poverty rate of 20 percent or more (In lieu of the poverty criteria, outmigration may be taken into account in designating one rural empowerment zone). For this purpose, census tracts with populations under 2,000 are treated as satisfying the 25-percent poverty rate criteria if (1) at least 75 percent of the tract was zoned for commercial or industrial use, and (2) the tract is contiguous to one or more other tracts that actually have a poverty rate of 25 percent or more. (A special rule enacted as part of the 1997 Act modifies the present-law empowerment zone and enterprise community designation criteria so that any zones or communities designated in the future in the States of Alaska or Hawaii will not be subject to the general size limitations, nor will such zones or communities be subject to the general poverty-rate criteria. Instead, nominated areas in either State will be eligible for designation as an empowerment zone or enterprise community if, for each census tract or block group within such area, at least 20 percent of the families have incomes which are 50 percent or less of the State-wide median family income. Such zones and communities will be subject to the population limitations under present-law section 1392(a)(1)).

Within the 20 additional empowerment zones, qualified "enterprise zone businesses" are eligible to receive up to $20,000 of additional section 179 expensing (however, the additional section 179 expensing is not available within the additional 2,000 acres allowed to be included under the 1997 Act within an empowerment zone) and to utilize special tax-exempt financing benefits. The "brownfields" tax incentive (described above) also is available within all designated empowerment zones. However, businesses within the 20 additional empowerment zones are not eligible to receive the present-law wage credit available within the 11 other designated empowerment zones (i.e., the wage credit is available only within the nine zones designated under OBRA 1993 and the two urban zones designated under the 1997 Act that are eligible for the same tax incentives as are available in the nine zones designated under OBRA 1993).

The 20 additional empowerment zones are required to be designated before 1999, and the designations generally will remain in effect for 10 years. (In addition, the 1997 Act also provides for special tax incentives (some of which are modeled after the empowerment zone tax incentives, but which also include a zero percent capital gains rate for certain qualified assets) for the District of Columbia).

Present-law section 1397C defines "qualified zone property" as depreciable tangible property (including buildings), provided that: (1) the property is acquired by the taxpayer (from an unrelated party) after the zone or community designation took effect; (2) the original use of the property in the zone or community commences with the taxpayer; and (3) substantially all of the use of the property is in the zone or community in the active conduct of a trade or business by the taxpayer in the zone or community. In the case of property which is substantially renovated by the taxpayer, however, the property need not be acquired by the taxpayer after zone or community designation or originally used by the taxpayer within the zone or community if, during any 24-month period after zone or community designation, the additions to the taxpayer's basis in the property exceed 100 percent of the taxpayer's basis in the property at the beginning of the period, or $5,000 (whichever is greater).

Present-law section 1397B defines the term "enterprise zone business" as a corporation or partnership (or proprietorship) if for the taxable year: (1) the sole trade or business of the corporation or partnership is the active conduct of a qualified business within an empowerment zone or enterprise community (a qualified proprietorship is not required to meet the requirement that the sole trade or business of the proprietor is the active conduct of a qualified business within the empowerment zone or enterprise community); (2) at least 50 percent of the total gross income is derived from the active conduct of a "qualified business" within a zone or community (the 1997 Act reduced this threshold from 80 percent (as enacted in OBRA 1993) to 50 percent); (3) a substantial portion of the business' tangible property is used within a zone or community; (4) a substantial portion of the business' intangible property is used in the active conduct of such business; (5) a substantial portion of the services performed by employees are performed within a zone or community; (6) at least 35 percent of the employees are residents of the zone or community; and (7) less than five percent of the average of the aggregate unadjusted bases of the property owned by the business is attributable to (a) certain financial property, or (b) collectibles not held primarily for sale to customers in the ordinary course of an active trade or business.

A "qualified business" is defined as any trade or business other than a trade or business that consists predominantly of the development or holding of intangibles for sale or license. (Also, a qualified business does not include certain facilities described in section 144(c)(6)(B)(e.g., massage parlor, hot tub facility, or liquor store) or certain large farms). In addition, the leasing of real property that is located within the empowerment zone or community to others is treated as a qualified business only if (1) the leased property is not residential property, and (2) at least 50 percent of the gross rental income from the real property is from enterprise zone businesses. (The 1997 Act provides that the lessor of property may rely on a lessee's certification that such lessee is an enterprise zone business). The rental of tangible personal property to others is not a qualified business unless at least 50 percent of the rental of such property is by enterprise zone businesses or by residents of an empowerment zone or enterprise community.

Tax-exempt private activity bonds may be issued to finance certain facilities in empowerment zones and enterprise communities. These bonds, along with most private activity bonds, are subject to an annual private activity bond State volume cap equal to $50 per resident of each State, or (if greater) $150 million per State. However, a special rule (enacted in the 1997 Act) provides that certain "new empowerment zone facility bonds" issued for qualified enterprise zone businesses in the 20 additional empowerment zones are not subject to the State private activity bond volume caps or the special limits on issue size generally applicable to qualified enterprise zone facility bonds. (The maximum amount of "new empowerment zone facility bonds" that can be issued is limited to $60 million per rural zone, $130 million per urban zone with a population of less than 100,000, and $230 million per urban zone with a population of 100,000 or more).

Qualified enterprise zone facility bonds are bonds 95 percent or more of the net proceeds of which are used to finance

1. "qualified zone property" (A special rule (enacted in the 1997 Act) relaxes the rehabilitation requirement for financing existing property with qualified enterprise zone facility bonds. In the case of property which is substantially renovated by the taxpayer, the property need not be acquired by the taxpayer after zone or community designation and need not be originally used by the taxpayer within the zone if, during any 24-month period after zone or community designation, the additions to the taxpayer's basis in the property exceed 15 percent of the taxpayer's basis at the beginning of the period, or $5,000 (whichever is greater)) the principal user of which is an "enterprise zone business" (For purposes of the tax-exempt financing rules, an "enterprise zone business" also includes a business located in a zone or community which would qualify as an enterprise zone business if it were separately incorporated. A special rule (enacted in the 1997 Act) waives the requirements of an enterprise zone business (other than the requirement that at least 35 percent of the business' employees be residents of the zone or community) for all years after a prescribed testing period equal to the first three taxable years after the startup period.), or
2. functionally related and subordinate land located in the empowerment zone or enterprise community. (A special rule (enacted in the 1997 Act) waives until the end of a "startup period" the requirement that 95 percent or more of the proceeds of a bond issue be used by a qualified enterprise zone business. With respect to each property, the startup period would end at the beginning of the first taxable year beginning more than two years after the later of (1) the date of the bond issue financing such property, or (2) the date the property was placed in service (but in no event more than three years after the date of bond issuance). This waiver is available only if, at the beginning of the startup period, there is a reasonable expectation that the use by a qualified enterprise zone business will be satisfied at the end of the startup period and the business makes bona fide efforts to satisfy the enterprise zone business definition). These bonds may only be issued while an empowerment zone or enterprise community designation is in effect.

The proposal would authorize the designation of 20 "renewal communities" within which special tax incentives would be available. The following is a description of the designation process and the tax incentives that would be available within the proposed renewal communities.

Designation of 20 renewal communities.--Under the proposal, the Secretary of HUD would be authorized to designate up to 20 "renewal communities" from areas nominated by States and local governments. At least 20 percent of the designated communities must be in rural areas (defined as areas which (1) are within local government jurisdictions with a population less than 50,000, (2) are outside of a metropolitan statistical area, or (3) are determined by HUD to be a rural area). The Secretary of HUD would be required to publish (within four months after enactment) regulations describing the selection process, and all designations of renewal communities would have to be made within 24 months after such regulations are published. Designations generally would remain in effect through December 31, 2006.

Old empowerment zones and enterprise communities could seek additional designation as renewal communities.--The proposal would allow the previously designated empowerment zones and enterprise communities to apply for designation as renewal communities. Priority would be given in the designation of the first 50 percent of renewal communities to nominated areas which are empowerment zones or enterprise communities under present law and which otherwise meet the requirements of the proposal for designation as a renewal community. If a previously designated empowerment zone or enterprise community is selected as one of the 20 renewal communities, then the area's designation as a empowerment zone or enterprise community would remain in effect and the same area would also be designated as a renewal community. For such an area obtaining dual-designation status, the special tax incentives available for empowerment zones (or enterprise communities, as the case may be) and for renewal communities would be available. If an area previously designated as an empowerment zone or enterprise community does not seek designation (or is not selected by the Secretary of HUD) as a renewal community, then the present-law empowerment zone and enterprise community provisions would continue to apply to that area.

Eligibility criteria.--To be designated as a renewal community, a nominated area would be required to meet all of the following criteria: (1) each census tract must have a poverty rate of at least 20 percent; (2) at least 70 percent of the households have incomes below 80 percent of the median income of households within the local government jurisdiction; (3) the unemployment rate is at least 1.5 times the national unemployment rate; and (4) the area is one of pervasive poverty, unemployment, and general distress.

Except with respect to the designation of the first 50 percent of renewal communities when priority would be given to existing empowerment zones and enterprise communities (as described above), those areas with the highest average ranking of factors (1), (2), and (3) above would be designated as renewal communities. The Secretary of HUD could also take into account in selecting areas for designation the extent to which such areas have a high incidence of crime, as well as whether the area has census tracts identified in the May 12, 1998, report of the Government Accounting Office regarding the identification of economically distressed areas.

There would be no geographic size or maximum population limitations placed on the designated renewal communities. The proposal merely would require that the boundary of a designated community be "continuous" and that the designated community have a population of at least 4,000 if the community is located within a metropolitan statistical area (at least 1,000 in all other cases, or the community must be entirely within an Indian reservation).

Required State and local government course of action.--In order for an area to be designated as a renewal community, the proposal would require State and local governments to submit a written course of action which promises within the nominated area at least five of the following: (1) a reduction of tax rates or fees; (2) an increase in the level of efficiency of local services; (3) crime reduction strategies; (4) actions to remove or streamline governmental requirements; (5) involvement by private entities and community groups, such as to provide jobs and job training and financial assistance; (6) State or local income tax benefits for fees paid for services performed by a nongovernmental entity which were formerly performed by a government entity; and (7) the gift (or sale at below fair market value) of surplus realty by the State or local government to community organizations or private companies.

In addition, the proposal would require that the nominating State and local governments promise to promote economic growth in the nominated area by repealing or not enforcing (1) licensing requirements for occupations that do not ordinarily require a professional degree, (2) zoning restrictions on home-based businesses which do not create a public nuisance, (3) permit requirements for street vendors who do not create a public nuisance, (4) zoning or other restrictions that impede the formation of schools or child care centers, and (5) franchises or other restrictions on competition for businesses providing public services, including but not limited to taxicabs, jitneys, cable television, or trash hauling, unless such regulations are "well-tailored to the protection of health and safety."

The following tax incentives generally would be available during the seven-year period beginning January 1, 2000 and ending December 31, 2006.

100-percent capital gain exclusion.--The proposal would provide for a 100 percent capital gains exclusion for long-term capital gain from the sale of a qualified community asset acquired after December 31, 1999 and before January 1, 2007, and held for more than five years. A "qualified community asset" would include: (1) qualified community stock (meaning original-issue stock purchased for cash in a "renewal community business," which is similar to the present-law definition of an "enterprise zone business"); (2) qualified community partnership interest (meaning a partnership interest acquired for cash in a renewal community business); and (3) qualified community business property (meaning tangible real and personal property used in a renewal community business if acquired (or substantially improved) by the taxpayer after January 1, 2000). Property would continue to be a "qualified community asset" if sold (or otherwise transferred) to a subsequent purchaser, provided that the property continues to represent an interest in (or is tangible property used in) a renewal community business. The termination of an area's status as a renewal community would not affect whether property is a qualified community asset, but any gain attributable to the period before January 1, 2000 and after December 31, 2006 would not be eligible for the 100-percent capital gains exclusion.

Family development accounts.--Under the proposal, individual taxpayers would be allowed to claim an above-the-line deduction for certain amounts paid in cash to a family development account ("FDA") established for the benefit of a "qualified individual," meaning an individual who both resides in a renewal community throughout the taxable year and was allowed to claim the earned income tax credit (EITC) during the preceding taxable year. A qualified individual may claim a deduction of up to $2,000 per year for amounts he/she contributes to his/her own FDA. Any other person may deduct up to $1,000 per year for amounts contributed to an FDA established on behalf of a qualified individual. Contributions to an FDA made on or before April 15th of a taxable year could be treated as made during the preceding taxable year. The proposal would permit (but not require) individuals to direct that the IRS directly deposit their EITC refunds into an FDA on behalf of such individual.

The proposal would provide that an FDA is exempt from taxation (other than the unrelated business income tax imposed by present-law section 511). Distributions from an FDA generally would be included in the gross income of the distributee (and would be subject to an additional 10-percent penalty tax (Penalty taxes would not be imposed, however, if a distribution is made after the account holder becomes 59 and ½ years old, or is made due to the death or disability of the account holder), but not if the distribution is used exclusively to pay (1) qualified post-secondary educational expenses, (2) certain first-home purchase costs, (3) certain qualified business capitalization costs approved by a financial institution or by a nonprofit loan fund, or (4) qualified medical expenses. Such qualified expenses must be incurred on behalf of the FDA account holder, or the spouse or dependent of the account holder.

In addition, the proposal would permit tax-free (and penalty-free) rollovers of amounts in an FDA into another such account established for the benefit of an individual who (1) both resides in a renewal community throughout the taxable year and was allowed to claim the earned income tax credit during the preceding taxable year, and (2) either is a spouse or dependent of the account holder.

The proposal also would provide that up to 25 percent of the renewal communities also will be designated by the Secretary of HUD as "FDA matching demonstration areas," with respect to which HUD would match amounts contributed to FDAs, up to $1,000 per individual per taxable year (with a $2,000 lifetime cap). The matching grant amounts made under this demonstration program would be excluded from the gross income of the account holder, and no deduction would be allowed for matching grant amounts. A 100-percent penalty would be imposed on a non-qualified distribution to the extent the distribution is attributable to the HUD matching contributions.

Commercial revitalization credit.--The proposal would allow taxpayers to claim a nonrefundable "commercial revitalization credit" (electing either (a) a 20-percent credit rate for the year a qualified building is placed in service or (b) a five-percent credit rate for each year during a 10-year period after the building is placed in service) for costs (up to $10 million per building) of constructing or substantially rehabilitating one or more buildings used for commercial purposes in a designated renewal community, including costs for the acquisition of land in connection with such buildings. A qualified building must be located in a renewal community and placed in service after December 31, 1999, and before January 1, 2007. Under the proposal, each State would be allowed to allocate no more than $2 million worth of credits to each renewal community located within the State for each calendar year.

Additional section 179 expensing.--A renewal community business (which is similar to the present-law definition of an enterprise zone business) would be allowed an additional $35,000 of section 179 expensing for qualified renewal property placed in service after an area is designated a renewal community. Thus, if a renewal community business is located in an area that is designated as both an empowerment zone and a renewal community, such business could be allowed an additional $55,000 of section 179 expensing (i.e., $20,000 of additional expensing because the area is designated an empowerment zone plus $35,000 of additional expensing because the area is designated a renewal community). As under present law, the section 179 expensing allowed to a taxpayer is phased out if the cost of section 179 property placed in service during the year by the taxpayer exceeds $200,000.

Expensing of environmental remediation costs ("brownfields").--Under the proposal, taxpayers could elect to treat certain environmental remediation expenditures that would otherwise be chargeable to capital account as deductible in the year paid or incurred. The expenditure must be incurred in connection with the abatement or control of environmental contaminants, as required by Federal and State law, at a trade or business site located within a designated renewal community. This proposal is substantially similar to the "brownfields" provision enacted as part of the 1997 Act, which allows taxpayers to expense certain environmental remediation expenditures on property located in an empowerment zone, enterprise community, or certain other designated areas. This provision would apply to expenditures incurred after December 31, 1999, and before January 1, 2007.

Extension of work opportunity tax credit.-- The proposal would provide the Work Opportunity Tax Credit ("WOTC") on an elective basis for eligible employers who hire individuals from one or more targeted groups that live and perform substantially all their work in a renewal community. It would do this by extending the expiration date of the WOTC for such employees to December 31, 2006. (The Work Opportunity Tax Credit expired July 1, 1998. A different section of the proposal would extend the Work Opportunity Tax Credit through February 29, 2000). Eligible employers would be those with a trade or business in a renewal community. The credit generally equals 40 percent (25 percent for employment of less than 400 hours) of qualified wages. Qualified wages consist of wages earned during the one-year period beginning with the day the individual begins work for the employer. Generally, no more than $6,000 of wages is permitted to be taken into account with respect to any individual during the first year of employment. Thus, the maximum credit per individual is $2,400. With respect to qualified summer youth employees, the maximum credit generally is 40 percent of up to $3,000 of qualified first-year wages, for a maximum credit of $1,200.