H.R. 3275 — Small Business Tax Relief Act

This section revises the corporate income tax rate imposed under IRC §11(b) to a graduated structure for corporations with taxable income not exceeding $5 million, applying an 18% rate to the first $400,000 of taxable income (from 21%) and a 21% rate to taxable income above $400,000 (unchanged), while retaining the flat 21% rate for all other corporations. The change applies to taxable years ending after enactment.

This section amends IRC §83(c)—which governs the timing of income inclusion for property transferred in connection with services—by adding special rules for partnership interests transferred for services to (or for the benefit of) the partnership. It treats the fair market value of such an interest as the recipient's share of proceeds from a hypothetical sale of all partnership assets at fair market value and liquidation (reduced by liabilities), and deems the recipient to have made the §83(b) election to include that value in gross income in the year of transfer unless the recipient elects otherwise under rules similar to §83(b)(2). The changes apply to interests transferred in taxable years ending after enactment.

This section establishes special income tax rules under new IRC §710 for an investment services partnership interest (i.e., a partnership interest allocable to a partner providing investment management services to the partnership). **(a) Distributive share.** Net capital gain with respect to such an interest is treated as ordinary income (allocated ratably to long-term capital gain items), and net capital loss is treated as ordinary loss (allocated ratably to long-term and short-term capital loss items, limited to cumulative prior recharacterized net gains). Dividends allocable to such an interest are ineligible for qualified dividend income treatment under IRC §1(h), and IRC §1202 (partial exclusion for qualified small business stock gain) does not apply. **(b) Dispositions.** Gain from disposition of such an interest is ordinary income (recognized notwithstanding other Code provisions); loss is ordinary to the extent of cumulative prior recharacterized net gains under subsection (a). Gifts and transfers at death carry over the interest's status (with income in respect of a decedent under IRC §691); contributions to another partnership are eligible for nonrecognition upon irrevocable election and compliance with reporting; and distributions of property require gain recognition to the extent fair market value exceeds adjusted basis (treated as ordinary income).

This section enhances the above-the-line deduction for self-employment taxes under IRC §164(f) (i.e., taxes self-employed individuals pay for Social Security and Medicare in lieu of FICA withholding) for taxpayers with adjusted gross income below $400,000 by increasing the deductible portion to three-quarters of such taxes (from one-half). The change applies to taxable years beginning after December 31, 2024.

This section increases the excise tax on repurchases of corporate stock to 1.5% (from 1%) of the fair market value of the stock repurchased by a covered corporation, for repurchases after December 31, 2024.