To permit startup partnerships and S corporations to elect taxable years other than required years.

Summary: Small Business Tax Flexibility Act of 2005 - Amends the Internal Revenue Code to permit certain small start-up businesses to elect a taxable year, other than the required taxable year, which ends on the last day of any of the months of April through November (or at the end of an equivalent annual period).

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Small Business Tax Flexibility Act 
of 2005''.

SEC. 2. QUALIFIED SMALL BUSINESSES ELECTION OF TAXABLE YEAR ENDING IN A 
              MONTH FROM APRIL TO NOVEMBER.

    (a) In General.--Part I of subchapter E of chapter 1 of the 
Internal Revenue Code of 1986 (relating to accounting periods) is 
amended by inserting after section 444 the following new section:

``SEC. 444A. QUALIFIED SMALL BUSINESSES ELECTION OF TAXABLE YEAR ENDING 
              IN A MONTH FROM APRIL TO NOVEMBER.

    ``(a) General Rule.--A qualified small business may elect to have a 
taxable year, other than the required taxable year, which ends on the 
last day of any of the months of April through November (or at the end 
of an equivalent annual period (varying from 52 to 53 weeks)).
    ``(b) Years for Which Election Effective.--An election under 
subsection (a)--
            ``(1) shall be made not later than the due date (including 
        extensions thereof) for filing the return of tax for the first 
        taxable year of the qualified small business, and
            ``(2) shall be effective for such first taxable year or 
        period and for all succeeding taxable years of such qualified 
        small business until such election is terminated under 
        subsection (c).
    ``(c) Termination.--
            ``(1) In general.--An election under subsection (a) shall 
        be terminated on the earliest of--
                    ``(A) the first day of the taxable year following 
                the taxable year for which the entity fails to meet the 
                gross receipts test,
                    ``(B) the date on which the entity fails to qualify 
                as an S corporation, or
                    ``(C) the date on which the entity terminates.
            ``(2) Gross receipts test.--For purposes of paragraph (1), 
        an entity fails to meet the gross receipts test if the entity 
        fails to meet the gross receipts test of section 448(c).
            ``(3) Effect of termination.--An entity with respect to 
        which an election is terminated under this subsection shall 
        determine its taxable year for subsequent taxable years under 
        any other method that would be permitted under subtitle A.
            ``(4) Income inclusion and deduction rules for period after 
        termination.--If the termination of an election under paragraph 
        (1)(A) results in a short taxable year--
                    ``(A) items relating to net profits for the period 
                beginning on the day after its last fiscal year-end and 
                ending on the day before the beginning of the taxable 
                year determined under paragraph (4) shall be includible 
                in income ratably over the succeeding 4 taxable years, 
                or (if fewer) the number of taxable years equal to the 
                fiscal years for which the election under this section 
                was in effect, and
                    ``(B) items relating to net losses for such period 
                shall be deductible in the first taxable year after the 
                taxable year with respect to which the election 
                terminated.
    ``(d) Definitions.--For purposes of this section--
            ``(1) Qualified small business.--The term `qualified small 
        business' means an entity--
                    ``(A)(i) for which an election under section 
                1362(a) is in effect for the first taxable year or 
                period of such entity and for all subsequent years, or
                    ``(ii) which is treated as a partnership for the 
                first taxable year or period of such entity for Federal 
                income tax purposes,
                    ``(B) which conducts an active trade or business or 
                which would qualify for an election to amortize start-
                up expenditures under section 195, and
                    ``(C) which is a start-up business.
            ``(2) Start-up business.--For purposes of paragraph (1)(C), 
        an entity shall be treated as a start-up business so long as 
        not more than 75 percent of the entity is owned by any person 
        who previously conducted a similar trade or business at any 
        time within the 1-year period ending on the date on which such 
        entity is formed. For purposes of the preceding sentence, a 
        person and any other person bearing a relationship to such 
        person specified in section 267(b) or 707(b)(1) shall be 
        treated as one person, and sections 267(b) and 707(b)(1) shall 
        be applied as if section 267(c)(4) provided that the family of 
        an individual consists of the individual's spouse and the 
        individual's children under the age of 21.
            ``(3) Required taxable year.--The term `required taxable 
        year' has the meaning given to such term by section 444(e).
    ``(e) Tiered Structures.--The Secretary shall prescribe rules 
similar to the rules of section 444(d)(3) to eliminate abuse of this 
section through the use of tiered structures.''.
    (b) Conforming Amendment.--Section 444(a)(1) of such Code is 
amended by striking ``section,'' and inserting ``section and section 
444A''.
    (c) Clerical Amendment.--The table of sections for part I of 
subchapter E of chapter 1 of such Code is amended by inserting after 
the item relating to section 444 the following new item:

``Sec. 444A. Qualified small businesses election of taxable year ending 
                            in a month from April to November.''.
    (d) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.