Omnibus Small Business Capital Formation Act of 1981

Omnibus Small Business Capital Formation Act of 1981 - Title I: Income Taxation - Subtitle A: Capital Formation - Allows individual taxpayers a ten percent income tax credit for investment in small business incentive stock (stock issues aggregating less than $15,000,000 by corporations with equity capital of less than $25,000,000). Limits the amount of such credit to $1,000 ($2,000 for taxpayers filing jointly). Denies such credit to individuals who dispose of incentive stock within 12 months of purchase.

Treats as long-term capital gain amounts actually paid to a taxpayer with respect to a small business participating debenture (SBPD) which constitute the distribution of a share of the earnings of the issuer.

Defines "small business participating debenture" (SBPD) as a written debt instrument issued by a qualified small business which: (1) is a general obligation of such business; (2) bears interest at not less than specified by the Secretary of the Treasury; (3) has a fixed maturity; (4) grants no voting or conversion rights in the business to the purchaser; and (5) provides for the payment of a share of the issuer's total earnings. Defines "qualified small business" as one: (1) whose equity capital does not exceed $25,000,000: (2) the face value of all of whose outstanding SBPD's does not exceed $1,000,000; and (3) which has no outstanding securities subject to regulation by the Securities and Exchange Commission.

Treats members of a controlled group of corporations as a single taxpayer. Denies capital gains treatment where the taxpayer is a "related party" to the SBPD issuer.

Treats losses on small business participating debentures as ordinary losses. Allows an interest expense deduction for interest and share-of-earnings payments made on such debentures.

Increases from 60 percent to 70 percent the deduction for capital gains from the sale or exchange of small business assets (equity interests in a business with net equity capital of less than $25,000,000). Reduces from 28 percent to 21 percent the alternative tax on such gain.

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 from 15 to 100 the permissible number of shareholders in a subchapter S corporation.

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 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.

Subtitle B: Capital Retention - Reduces corporate income tax rates.

Revises the method for determining useful lives of business assets for purposes of computing allowable depreciation deductions. Replaces the asset depreciation range (ADR) method with a schedule of capital cost recovery periods for two classes of business property.

Establishes capital cost recovery periods for the following classes of business property: (1) tangible property, five years; and (2) automobiles, taxis, and light-duty trucks (up to $100,000), three years. Permits calculation of the investment tax credit for such property without regard to the useful life of the property. Requires the recapture of depreciation amounts and investment tax credit amounts applicable to assets which are sold or otherwise disposed of prior to the expiration of the capital cost recovery period. Permits a taxpayer to deduct less than the full allowance for capital cost recovery in any taxable year. Permits a carryover to succeeding taxable years of any unused depreciation amounts.

Disqualifies capital cost recovery property from the allowance for first year depreciation.

Treats amounts claimed as the capital cost recovery of noncorporate lessors as an item of tax preference for purposes of the minimum tax.

Adopts as an accounting practice the "half year convention" under which investments eligible for capital cost recovery treatment or the investment tax credit which are made at any time during the taxable year are deemed to be made in the middle of such year.

Increases the accumulated earnings credit for corporations other than specified service corporations.

Increases the allowable cost of used property eligible for the investment tax credit.

Subtitle C: Employee Stock Options - 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) the 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.

Subtitle D: Inventory Accounting for Small Businesses - Allows a qualified small business to elect the cash receipts and disbursements method of accounting regardless of any requirement to use inventories if: (1) the average annual gross receipts for the three preceding taxable years do not exceed $1,000,000; and (2) such small business was qualified for each of the two preceding taxable years.

Allows a taxpayer who adopts the last-in, first-out (LIFO) method of accounting to spread increases in taxable income attributable to such change over a ten-year period. Permits a taxpayer who is required to change his method of accounting pursuant to Revenue Ruling 80-60 (inventory valuation) and Revenue Procedure 80-5 to effect such a change only for taxable years beginning after December 31, 1980.

Title II: Estate and Gift Taxes - Increases the unified credit against the estate and gift taxes from $47,000 to $192,800. Makes such increase, in the case of the gift tax, in specified annual increments through 1985. Increases from $175,000 to $600,000 the minimum gross estate requiring filing of a return.

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

Increases from $3,000 to $6,000 the annual gift tax exclusion.

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 actively managed the property for ten years prior to 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 of 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. Allows net crop share rentals to qualify for the special use valuation as well as cash rentals. Authorizes the step-up in basis of assets.

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

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.

Authorizes an individual to elect to pay a gift tax rather than use the unified tax credit.

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.