Small Business Investment Act of 1981

Small Business Investment Act of 1981 - Amends the Internal Revenue Code to reduce corporate income tax rates.

Exempts from income taxation any income resulting from the transfer of stock to an individual exercising a stock option under an incentive stock option plan. Specifies that the optionee may not dispose of stock within two years after an option is granted nor within one year after the transfer of shares. Requires that the optionee be an employee of the corporation granting such option at all times during the period after an option is granted and for three months after such option is exercised.

Defines "incentive stock option" as an option granted to an individual in connection with employment by a corporation to purchase stock of such corporation. Sets forth the following conditions for the granting of such options: (1) approval of a plan for granting options by the shareholders of the corporation; (2) the granting of options within ten years of either the adoption or approval of the plan; (3) the termination of the option after ten years; (4) an option-price which is not less than the fair market value of the stock subject to such option; (5) the nontransferability of the option; and (6) the optionee may not hold more than ten percent of the stock of the corporation, unless the option price is at least 110 percent of the fair market value of the stock subject to the option and such option is terminable five years after it is granted.

Allows corporations engaged in marketmaking activities a limited deduction equal to the lesser of: (1) the amount of additions during the taxable year to a reserve for gains from marketmaking activities; or (2) the amount of gain from such activities. Defines "marketmaking activities" as the purchase and sale by a dealer in securities of over-the-counter equity securities which are: (1) issued by a corporation with less than $25,000,000 in stock and securities outstanding; and (2) held primarily for sale to customers in the ordinary course of trade or business. Requires specified withdrawals from the marketmaking reserve at the close of the taxable year and includes amounts so withdrawn in gross income.

Provides for nonrecognition of any long-term capital gain from the sale of small business stock, except to the extent that the taxpayer's sale price exceeds the cost of small business stock purchased by the taxpayer within 18 months after the date of such sale. Prescribes a three-year statute of limitations for the assessment of any deficiency attributable to gain realized by the sale of such stock.

Increases the allowable number of shareholders in a Subchapter S Corporation from 15 to 25.

Increases the allowable cost of used property eligible for the investment tax credit and allows a three-year carryback and seven-year carryover of the excess cost of such property.

Permits the quarterly refund of excise taxes on special fuels used for nontaxable purposes by intercity, local, or school buses if $50 or more of the refundable amount is payable during any of the first three quarters of the taxable year.

Reduces the estate and gift tax rates. Provides for an exemption of $300,000 reduced by amounts allowed as specific exemptions by repealed Code provisions from the gross estate and from the amount used in computing taxable gifts. Repeals the unified credit against the estate and gift taxes.

Repeals the existing limitations on the marital deduction for gift and estate taxes.

Increases from $3,000 to $10,000 the annual gift tax exclusion.

Revises the definition of "qualified real property," for purposes of the special use valuation, to qualify property used by a member of the decedent's family.

Permits disabled individuals and those receiving social security benefits to qualify for the special use valuation of certain farms and other real property if they have materially participated in the operation of the farm or business for five out of the eight years preceding the year in which they become disabled or eligible for such benefits.

Permits the spouse of a decedent to use such valuation if the spouse has actually managed the farm or business for ten years preceding the decedent's death or takes over active management upon the decedent's death.

Permits the owner of a woodland to qualify for the special use valuation if he or she has used such property for a farming purpose for ten years prior to the decedent's death.

Reduces from 15 to ten years the length of time a qualified property must be held following the decedent's death before it can be disposed of without incurring a recapture of estate tax benefits.

Permits active management rather than material participation as a test for qualification for the estate for spouses, children under 21, students, and disabled individuals who receive property from a decedent who qualified for special use valuation.

Repeals the $500,000 limitation on the reduction of the value of qualified real property permitted the special use valuation.

Allows like kind exchange of property without loss of special use valuation qualification.

Repeals the requirement that an heir elect special treatment for involuntary conversions of qualified real property, thus making such treatment automatic upon such conversion.

Revises the method of valuing farms to permit the use of bases other than cash in calculating average annual gross rental, whether or not any portion of the property has in fact been rented.

States that gifts made within three years of a decedent's death shall be valued as of the time of transfer rather than as of the date of death.

Modifies the alternate extension of time for payment of the estate tax where the estate consists largely of an interest in a closely held business to: (1) allow an installment payment election if the value of the interest in the closely held business is either 35 percent of the value of the gross estate or 50 percent of the taxable estate; (2) increase to 50 percent the value of an interest disposed of which will accelerate the payment of tax; and (3) permit payment, but with a penalty, of an installment within six months after the due date.

Allows a disclaimer of an interest in property for estate tax purposes in specified circumstances where such disclaimer does not result in the passing of the interest concerned under the applicable State law.

Increases the capital gains deduction from 60 percent to 75 percent.

Reduces the rate of alternative minimum tax for individuals. Reduces the alternative tax on the capital gains of corporations.