(A) As used in this section:

1. (1) "Active trade or business income or loss" means income or loss of an individual, estate, trust, or any other entity except those taxed or exempted from tax pursuant to Sections 12-6-530 through 12-6-550 resulting from the ownership of an interest in a pass-through business. Active trade or business income or loss does not include:

   1. (a)

      1. (i) passive investment income as defined in Internal Revenue Code Section 1362(d) generated by a pass-through business and income of the same type regardless of the type of pass-through business generating it; and
      2. (ii) expenses related to passive investment;
   2. (b) capital gains and losses;
   3. (c) payments for services referred to in Internal Revenue Code Section 707(c);
   4. (d) amounts reasonably related to personal services. All amounts paid as compensation and all guaranteed payments for services, but not for the use of capital, as defined in Internal Revenue Code Section 707(c) are deemed to be reasonably related to personal services. In addition, if an owner of a pass-through entity who performs personal services for the entity is not paid a reasonable amount for those personal services as compensation or payments referred to in Internal Revenue Code Section 707(c), all of the owner's income from the entity is presumed to be amounts reasonably related to personal services. For purposes of this section, amounts reasonably related to personal services include amounts reasonably related to the personal services of the owner, the owner's spouse, and any person claimed as a dependent on the owner's income tax return.
2. (2) "Pass-through businesses" mean sole proprietorships, partnerships, and "S" corporations, including limited liability companies taxed as sole proprietorships, partnerships, or "S" corporations.

(B)

1. (1) Notwithstanding Section 12-6-510, a taxpayer may elect annually to have the income tax at the rate provided in item (2) of this subsection imposed annually on the active trade or business income received by the owner of a pass-through business. For joint returns, the election is effective for both spouses. The amount subject to tax pursuant to this section is not subject to tax pursuant to Section 12-6-510.

2. (2) The rate of the income tax imposed pursuant to this subsection is:

   Taxable Year Beginning in Rate of Tax

   2006 6.5 percent

   2007 6 percent

   2008 5.5 percent

   after 2008 5 percent

(E)

1. (1) Notwithstanding item (A)(1)(e) of this section, if a taxpayer owns an interest in one or more pass-through businesses that have a total gross income of less than one million dollars and taxable income of less than one hundred thousand dollars, then the taxpayer may elect, instead of determining the actual amount of active trade or business income related to his personal services, to treat fifty percent of his active trade or business income as not related to his personal services. For purposes of this item, the term taxpayer includes both taxpayers who file a joint return.
2. (2) The department may provide other methods that may be used to determine an amount that is considered to be unrelated to the owner's personal services if it determines that the benefits to the State of taxing income from personal services at a higher rate are insufficient to justify the burdens imposed on the taxpayer.