Small Business Tax Simplification and Reform Act

Small Business Tax Simplification and Reform Act - Title I: Tax Simplification Relating to Small Business - Creates a Committee on Tax Simplification for Small Business to devote continued attention to the simplification of the application of the Internal Revenue Code and tax procedures, forms, and regulations to small business. Provides that the membership of the Committee shall include representatives of the Secretary of the Treasury, the Internal Revenue Service, the Office of Management and Budget, and the Small Business Administration. Directs the Committee to establish an advisory committee of individuals from the private sector to assist it.

Creates in the Treasury Department an Office of Small Business Tax Analysis, which shall be responsible for studying the effect of taxes on small business and other small business problems. Directs the Treasury Department to make a comprehensive study of depreciation policies as they affect small business, with particular attention to: the impact of legislation; the rapid advances in technology to which small business must adapt; and the practices of other developed nations. Requires the Treasury Department to make recommendations to Congress for changes in the tax treatment of pension, profit-sharing and stock bonus plans, health, and insurance benefits offered by corporations and other forms of businesses to their employees and executives, so as to equalize tax benefits for small business enterprises.

Directs the Treasury Department, with the assistance of the Small Business Tax Analyst, to make a study of the relative effects of tax law changes on businesses of different sizes.

Directs the Secretary of the Treasury to make recommendations, with the assistance of the Tax Analyst, to the House Ways and Means and Senate Finance Committees for restructuring the Internal Revenue Code so as to consolidate those provisions relating primarily to new and small business enterprises into one chapter or other subdivision.

Allows small businesses to make monthly payments of withheld employee taxes, FICA and retailer's and merchandising excise taxes where their monthly aggregate does not exceed $7,000.

Title II: Adjustment of Corporate Normal Tax - Establishes graduated normal corporate tax rates.

Title III: Special Provisions to Encourage Establishment of New Small Business Enterprises - Permits eligible new small business corporations to take an income tax deduction equal to their net operating income where it does not exceed $83,333 multiplied by the number of eligible months in the corporation's taxable year. Limits eligibility to the first 36 months of existence. Allows an income tax deduction, ratable over 60 months, to a partnership for its organizational expenses. Allows a bad debt tax deduction to guarantors and lenders of small business corporations. Allows community development cooperatives which provide retail goods and services to low- and moderate-income individuals in their communities to allocate patronage dividends which are redeemable for periods less than 90 days.

Doubles the limitation on small business stock losses which may be deducted as ordinary losses to $50,000 ($100,000 for married individuals filing joint returns). Increases, by 50 percent, the allowable size of corporations offering small business stock plans.

Title IV: Provisions to Assist Small Business Growth - Increases the additional first-year depreciation limitation for small business property from $10,000 to $20,000. Provides that the useful life of small business property shall not exceed the period specified in Revenue Procedure 62-21. Eliminates the reserve ratio test for firms designated as small businesses by the Small Business Administration.

Reinstates the seven percent investment credit for specified small business property. Allows corporate manufacturers up to $50,000 worth of qualified investments for this credit.

Allows a ten year carryover of small business net operating losses. Allows corporations to escape their tax liability for accumulated earning by deducting dividends paid within 90 days after such liability is determined. Provides a flat 22 percent rate for the tax on accumulated earnings. Increases the allowable limitation on allowable credit for accumulated earnings to $150,000 or $250,000 for small business concerns which establish a reasonable intention of future expansion which would require more than $150,000.

Allows the amortization of the expenses of certain types of small business stock flotations over a period of 60 months. Allows the amortization of the research and development expenses of small businesses from the time they are made.

Excludes small corporations from the limitations on multiple surtax exemptions for controlled corporations if 50 percent of the business's voting stock is owned by its manager and spouse and 80 percent is owned by the manager and members of his family. Limits each family to five surtax exemptions under this provision.

Title V: Provisions Relating to Partnerships - Excludes guaranteed payments from the gross income of a partner. Allows the closing of the partnership year for a decedent at the following times: (1) normal liquidation of the partnership interest if there has been no sale, exchange or liquidation; (2) the date of any of the above described transactions; or (3) the day after the partner's death. Prevents the termination of a partnership for reasons of sale or exchange of 50 percent or more of the total interest in partnership capital and profits unless the interest is sold to persons other than the persons who have been members of the partnership for the 12 month period prior to the sale or exchange.

Treats the assumption of partnership liabilities by a partner as a contribution of money to the partnership. Treats any decrease in a partner's individual liabilities to a partnership as a distribution of money by the partnership.

Title VI: Provisions Relating to Subchapter S Corporations - Increases the availability of Subchapter S status to small business corporations in the following ways: (1) initial shareholders may number 15, rather than 10; (2) shareholders in excess of this ceiling who inherit their stock will not disqualify the corporation; and (3) after five years, the number of permissible shareholders may number 25.

Allows the following types of trusts to be shareholders of a Subchapter S corporation: (1) trusts where stock passes pursuant to a will, and where the trust is used merely to convey the stock to a long term eligible holder within 60 days; (2) trusts where the entire income is taxable to the grantor; and (3) trusts created primarily to exercise the voting power of stock transferred to them.

Allows Subchapter S Corporations to exceed the 20 percent limitation on passive income in a single year. Provides that Subchapter S status will be lost if this limitation is exceeded in any two of any four consecutive years.

Provides that if the corporation is able to establish that the termination of Subchapter S status was due to noncompliance with the shareholders' requirements and it can achieve full compliance within 90 days of notification, its status will be preserved. Provides for the carryover to the succeeding taxable year of a small business shareholder's part of the net operating losses of a small business corporation which exceeds the limitation on deductions for such losses.

Title VII: Business Development Corporations - Permits States and local development companies to take a bad-debt reserve deduction for up to ten percent of outstanding loans to new enterprises, if such loans would not be made by banks.

Allows certain types of business development corporations to not recognize the gain on certain investments in businesses if such gain is re-invested within the areas of service and do not inure to the benefit of any individual or private institution.

Title VIII: Preservation of Small Business Independence - Allows early recovery of overpayments of estimated taxes by small businesses.

Disallows interest deductions beyond $500,000 on any loan for corporate acquisitions by small businesses.

Permits valuation comparisons for estate tax purposes with any similar closely held corporation whether or not it is listed on an exchange.

Directs the Treasury Department to conduct a comprehensive examination of the effect of the income tax, capital gains tax, and estate and gift taxes which cause small businesses to sell or merge out of existence.