Small Business Tax Reform Act of 1985

Small Business Tax Reform Act of 1985 - Amends the Internal Revenue Code to reduce the tax rates for corporations with taxable income below $125,000.

Increases the dollar limitation with respect to the election to expense (current deduction) certain business assets.

Permits a taxpayer who sells property to not recognize any gain realized on the sale to the extent that the amount realized from the sale is used to purchase a qualified small business investment within one year from the sale of the property. Requires the taxpayer to file an election for such treatment.

Treats any exchange of property as a sale for purpose of the nonrecognition provision.

Requires that the basis of the small business investment be reduced by the amount of the gain not recognized on the sale of the property. Extends the period of the statute of limitations with respect to assessment of tax relating to such sale or exchange.

Permits an 80 percent capital gains deduction attributable to the sale of a small business equity investment held for at least four years.

Permits the one-time of exclusion from income of gain from the sale of a substantial equity interest in a small business by an individual who has attained the age of 65. Requires the small business interest sold to have been a small business investment held by the taxpayer for ten years prior to the date of the sale or exchange. Provides special rules for such exclusion.

Permits a taxpayer to elect to use the cash receipts and disbursement of accounting for a trade or business if: (1) the annual gross receipts do not exceed $2,000,000 for each of the three taxable years ending with the election year; and (2) the taxpayer was a qualified small business for each of such three taxable years.

Provides that the Internal Revenue Service shall be subject to the Regulatory Flexibility Act.