means, with respect to any taxable year, the Federal short-term rate (determined under section 1274(d) for the month in which or with which such taxable year ends) plus 7 percentage points. (4) Asset balance (A) In general The asset balance with respect to any active business activity referred to in paragraph (1) for any taxable year equals the taxpayer’s adjusted basis of any property described in section 1221(a)(2) which is used in connection with such activity as of the end of the taxable year (determined without regard to sections 168(k) and 179). (B) Application to activities carried on through partnerships and S corporations In the case of any active business activity carried on through a partnership or S corporation, the taxpayer shall take into account such taxpayer’s distributive or pro rata share (as the case may be) of the asset balance with respect to such activity as determined with respect to such partnership or S corporation under subparagraph (A) (applied by substituting the partnership’s or S corporation’s adjusted basis for the taxpayer’s adjusted basis ). (g) Reduced rate for small businesses with net active business income (1) In general The tax imposed by section 1 shall be reduced by 3 percent of the excess (if any) of— (A) the least of— (i) qualified active business income, (ii) taxable income reduced by net capital gain (as defined in section 1(h)(11)(A)), or (iii) the 9-percent bracket threshold amount, over (B) the excess (if any) of taxable income over the applicable threshold amount. (2) Phase-in of rate reduction In the case of any taxable year beginning before January 1, 2022, paragraph (1) shall be applied by substituting for 3 percent — (A) in the case of any taxable year beginning after December 31, 2017, and before January 1, 2020, 1 percent , and (B) in the case of any taxable year beginning after December 31, 2019, and before January 1, 2022, 2 percent . (3) Qualified active business income For purposes of this subsection, the term qualified active business income means the