Small Business Tax Act of 1981

Small Business Tax Act of 1981 - Amends the Internal Revenue Code to allow an election by small businesses which are at least 70 percent owned by active participants in the trade or business and which have average annual gross receipts of $500,000 or less for the three taxable years ending with the year of election to use the cash receipts and disbursements method of accounting without regard to any inventory requirements.

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.

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

Permits the nonrecognition of gain from the sale of any property, except to the extent that the amount realized from the sale exceeds the cost of common or preferred stock of a qualified small business corporation purchased by the taxpayer within one year after the date of such sale. Defines "qualified small business corporation" as a small business corporation whose passive investment income, for the taxable year or for any of the three subsequent taxable years, does not exceed 15 percent of its gross receipts. Requires a reduction of the basis of such stock by the amount of gain not recognized. Prescribes a three-year statute of limitations for the assessment of any deficiency attributable to gain realized by the sale of such property.

Reduces corporate income tax rates.