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 for the purpose of devoting continued attention to the simplification of the Internal Revenue Code to small business, and the regulations, instructions, procedures, and other publications relating to small business taxation. Provides that the membership of the Committee would include representatives of the Secretary of the Treasury (for policy matters); Internal Revenue Service (for technical matters); Office of Management and Budget (for coordinating the paperwork aspects of IRS forms, in view of the Federal Reports Act) and the Small Business Administration to express the interests of the small business community.

Creates in the Treasury Department an Office of Small Business Analyst, which would be responsible for looking at tax problems primarily from the view of small business and the free enterprise system.

Calls upon the Treasury Department to make a comprehensive study of depreciation policies with particular attention to: the impact of legislation; the rapid advances in technology to which small business must adopt; and the practices of other industrialized nations.

Calls upon the Treasury to study the entire range of pension, retirement, health, medical, and insurance benefits in the larger context of what both corporations (including large corporate enterprises) and other forms of business are providing for their employees and executives.

Authorizes a special study of the differential effect of tax law changes on businesses of different sizes.

Title II: Adjustment of Corporate Normal Tax - Effects a progressive reform in the entire corporate tax structure by providing for reductions in normal corporate tax rates based on the corporations earnings. Provides that as corporate earnings rise above $1 million per year the normal tax would incline upward to a maximum of 24 percent for corporations earning over $1 billion annually.

Title III: Special Provisions to Encourage Establishment of New Small Business Enterprises - Permits eligible new small business corporations an income tax deduction equal to the corporations net operating income, so long as that amount does not exceed $83,333. Allows an income tax deduction to a partnership for its organizational expenses ratably over a period of 60 months. Provides for a bad debt tax deduction for guarantors of obligations of, and lenders to, small business corporations.

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 property used in the production of income by a small business shall not become longer then specified in Revenue Procedure 62-21. Eliminates the reserve ratio test for firms designated as "small business" by the Small Business Administration.

Reinstates the 7 percent investment credit for specified small business property. Provides that corporate manufacturing would be allowed $50,000 worth of qualified investment.

Extends the period for use of the loss carryover provisions for small businesses by allowing existing corporations to carry these losses over a ten year period. Raises the earning credit in accordance with the costs of doing business to $150,000.

Allows the expenses of certain types of Small business stock flotations to be amortized over a period of 60 months.

Allows research and development expenses of small businesses to be amortized beginning at the time they are made.

Permits a limited number of surtax exemptions (up to 5) in the event members of a family are placed in proprietary positions where they have ownership of at least 50 percent of the stock (or other interest) and full time management of a separately incorporated unit of a family business.

Title V: Provisions Relating to Partnerships - Allows the closing of the partnership year for a decedent at any of the following times: (1) normal close of the partnership year if there has been no prior sale, exchange, or liquidation of the partnership interest; (2) the date of any of the above described transactions; or (3) the day after the partner's death.

Permits a partner to deduct currently his share of partnership losses in excess of the adjusted basis of his partnership interests, in the event that the partner is unconditionally obligated for his share of such partnership losses.

Title VI: Provisions Relating to Subchapter S Corporations - Increases the Subchapter S S "tax-option" to small business corporations in the following 3 ways: (1) initial shareholders could number 15, rather than the present 10; (2) shareholders in excess of this ceiling who take their stock by reason of heirship would not disqualify election; and (3) after 5 years, the number of permissible shareholders would increase to 25.

Provides that the classes of shareholders would be expanded to include: (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) certain small business investment companies.

Provides for nondisqualification of a Subchapter S corporation by reason of exceeding the limit of 20 percent passive income in a single year. Provides that the election privilege shall be lost pursuant to this proposal if the limit is exceeded in any 2 of 4 consecutive years.

Provides that if the corporation is able to establish that the termination was, in fact, inadvertent and can gain full compliance within 90 days of notification, its Subchapter S status would be preserved for future years.

Title VII: Business Development Corporations - Permits State and local development companies to extend long-term financing to non-bankable new enterprises and such companies would be permitted a bad-debt reserve deduction up to 10 percent of outstanding loans.

Provides that certain types of business development corporations would be nontaxable upon the condition that the proceeds from such unusual transactions are re-invested within the area of service and no part of these proceeds inures to the benefit of any individual or private institution.

Title VIII: Preservation of Small Business Independence - Allows recovery of losses in 1 or 2 quarters to the extent the newly estimated tax for the year is less than the amount already paid in.

Disallows interest deductions beyond $500,000 on any loan for small business acquisition purposes.

Permits valuation comparisons with any similar closely held corporation whether or not it is listed on an exchange. Changes the standard of "undue hardship" (required to qualify for 10-year estate tax installments) to "hardship".

Directs the Treasury Department to conduct a comprehensive examination of the pressures of income taxes, capital gains tax, reorganization rules, and estate and gift taxes which are causing so many small businesses to sell or merge out of existence rather than continue in independent form.