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103D CONGRESS

1ST SESSION H. R. 104

To amend the Internal Revenue Code of 1986 to promote investment in

small businesses by providing Federal tax relief and simplification for

such businesses and their investors.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 5, 1993

Mr. MICHEL (for himself, Mr. ARCHER, and Mrs. MEYERS of Kansas) introduced the following bill; which was referred to the Committee on Ways

and Means

A BILL

To amend the Internal Revenue Code of 1986 to promote

investment in small businesses by providing Federal tax

relief and simplification for such businesses and their

investors.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Small Business Investment Act of 1993’’.

6 (b) AMENDMENTS OF 1986 CODE.—Except as other7 wise expressly provided, whenever in this Act an amend8 ment or repeal is expressed in terms of an amendment
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1 to, or repeal of, a section or other provision, the reference

2 shall be considered to be made to a section or other provi3 sion of the Internal Revenue Code of 1986.

4 SEC. 2. PURPOSE.

5 It is the purpose of this Act to simplify Federal tax

6 laws applicable to small businesses. The resulting decrease

7 in operating costs and increase in economic return will

8 stimulate small business investment and create new jobs.

9 SEC. 3. EFFECTIVE DATE.

10 Except as otherwise provided, the amendments made

11 by this Act shall apply to taxable years beginning after

12 December 31, 1992.

13 TITLE I—INVESTMENT

14 INCENTIVES

15 SEC. 101. INCREASE IN SMALL BUSINESS EXPENSING AL16 LOWANCE.

17 Section 179(b)(1) (relating to dollar limitation) is

18 amended by striking ‘‘$10,000’’ and inserting ‘‘$25,000’’.

19 SEC. 102. ELECTION TO EXPENSE SMALL BUSINESS START20 UP EXPENDITURES.

21 (a) GENERAL RULE.—Section 195 (relating to treat22 ment of start-up expenditures) is amended by redesignat23 ing subsections (c) and (d) as subsections (d) and (e), re24 spectively, and by inserting after subsection (b) the follow25 ing new subsection:
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1 ‘‘(c) ELECTION TO EXPENSE.—

2 ‘‘(1) GENERAL RULE.—Notwithstanding sub3 section (a), start-up expenditures may, at the elec4 tion of a qualified taxpayer, be allowed as a deduc5 tion for the taxable year in which the active trade

6 or business begins. The amount of start-up expendi7 tures allowed as a deduction under the preceding

8 sentence to any taxpayer shall not exceed $2,500.

9 ‘‘(2) QUALIFIED TAXPAYER.—A taxpayer is a

10 qualified taxpayer if the taxpayer reasonably expects

11 or knows (as of the due date, determined with re12 gard to extensions, for filing its return for the tax13 able year in which the active trade or business be14 gins) that the taxpayer’s gross receipts for the 12-

15 month period beginning with the month in which the

16 active trade or business begins will not exceed (or

17 has not exceeded) $500,000.

18 ‘‘(3) IN ADDITION TO ELECTION TO AMOR19 TIZE.—If the taxpayer makes an election under

20 paragraph (1), start-up expenses that exceed $2,500

21 may, at the election of the taxpayer, be treated as

22 deferred expenses as provided in subsection (b).

23 ‘‘(4) AGGREGATION RULES.—All persons treat24 ed as a single employer under subsection (a) or (b)
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1 of section 52 shall be treated as one person for pur2 poses of this subsection.’’.

3 (b) CONFORMING AMENDMENT.—Paragraph (1) of

4 section 195(e) (as redesignated by subsection (a)) is

5 amended by striking ‘‘subsection (b)’’ and inserting ‘‘sub6 section (b) or (c)’’.

7 SEC. 103. SMALL BUSINESS AMT EXCEPTIONS.

8 (a) GENERAL RULE.—Part VI of subchapter A of

9 chapter 1 is amended by inserting after section 58 the fol10 lowing new section:

11 ‘‘SEC. 58A. SPECIAL EXCEPTIONS FOR SMALL BUSINESSES.

12 ‘‘(a) GENERAL RULE.—For purposes of this part—

13 ‘‘(1) the adjustments listed in subsection (b),

14 and

15 ‘‘(2) the preferences listed in subsection (c),

16 shall not be taken into account for any purpose in comput17 ing alternative minimum taxable income from any quali18 fied small business activity of the taxpayer.

19 ‘‘(b) ADJUSTMENTS NOT TAKEN INTO ACCOUNT BY

20 QUALIFIED SMALL BUSINESS TAXPAYERS.—The adjust21 ments listed in this subsection are the adjustments pro22 vided by the following provisions:

23 ‘‘(1) Section 56(a)(1) (relating to depreciation).

24 ‘‘(2) Section 56(a)(2) (relating to mining explo25 ration and development costs).
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1 ‘‘(3) Section 56(a)(3) (relating to long-term

2 contracts).

3 ‘‘(4) Section 56(a)(5) (relating to pollution con4 trol facilities).

5 ‘‘(5) Section 56(a)(6) (relating to installment

6 sales).

7 ‘‘(6) Section 56(b)(2) (relating to circulation

8 and research expenditures).

9 ‘‘(7) Section 56(c) (relating to special adjust10 ments for corporations).

11 ‘‘(c) PREFERENCES NOT TAKEN INTO ACCOUNT BY

12 QUALIFIED SMALL BUSINESSES.—The preferences listed

13 in this subsection are the preferences provided by the fol14 lowing provisions:

15 ‘‘(1) Section 57(a)(1) (relating to depletion).

16 ‘‘(2) Section 57(a)(2) (relating to intangible

17 drilling costs).

18 ‘‘(3) Section 57(a)(4) (relating to bad debts re19 serve).

20 ‘‘(4) Section 57(a)(7) (relating to accelerated

21 depreciation or amortization).

22 ‘‘(d) DEFINITIONS.—

23 ‘‘(1) QUALIFIED SMALL BUSINESS ACTIVITY.—

24 For purposes of this section, the term ‘qualified

25 small business activity’ means any trade or business
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1 activity conducted by an individual or by a corpora2 tion or partnership if such individual or entity (as

3 the case may be) meets the $1,000,000 gross re4 ceipts test of paragraph (3) for all prior taxable

5 years beginning after December 31, 1991.

6 ‘‘(2) $1,000,000 GROSS RECEIPTS TEST.—For

7 purposes of paragraph (1)—

8 ‘‘(A) IN GENERAL.—An individual or en9 tity meets the $1,000,000 gross receipts test of

10 this subsection for any prior taxable year if the

11 average annual gross receipts of such person or

12 entity for the 3-taxable year period ending with

13 such prior taxable year does not exceed

14 $1,000,000.

15 ‘‘(B) AGGREGATION AND SPECIAL

16 RULES.—For purposes of subparagraph (A),

17 aggregation and special rules similar to the

18 rules of paragraphs (2) and (3) of section

19 448(c) shall apply in determining whether an

20 individual or entity satisfies the $1,000,000

21 gross receipts test.

22 ‘‘(e) FRESH START TRANSITIONAL RULES FOR AN

23 ACTIVITY THAT CEASES TO BE A QUALIFIED SMALL

24 BUSINESS ACTIVITY.—
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1 ‘‘(1) IN GENERAL.—If an activity ceases to be

2 a qualified small business activity, the adjustments

3 and preferences with respect to the activity listed in

4 subsections (b) and (c) shall be applied in computing

5 alternative minimum taxable income for the taxable

6 year of the cessation and subsequent taxable years

7 by substituting the last day of the last taxable year

8 in which the activity was as a qualified small busi9 ness activity for December 31, 1986, and December

10 31, 1989. Any references to January 1, 1987, or

11 January 1, 1990, in sections 56 and 57 shall be

12 treated as if such references were to the first day of

13 the taxable year in which the activity ceased to be

14 a qualified small business activity.

15 ‘‘(2) EFFECT OF ADJUSTMENTS PRIOR TO THE

16 ENACTMENT OF THIS SECTION.—

17 ‘‘(A) IN GENERAL.—In determining the

18 amount of any adjustments or preferences with

19 respect to an activity in a taxable year in which

20 (or after) the activity ceases to be a qualified

21 small business activity, any of the adjustments

22 listed in subsection (b) and previously taken

23 into account with respect to the activity in a

24 taxable year beginning on or before December

25 31, 1992, shall be disregarded.
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1 ‘‘(B) FRESH START BASIS.—As of the first

2 day of the taxable year in which an activity

3 ceases to be a qualified small business activity,

4 the basis of the activity’s assets for purposes of

5 determining the regular tax shall be used in

6 computing the adjustments and preferences re7 quired under sections 56 and 57.

8 ‘‘(f) ELECTION TO BE TREATED AS OTHER THAN

9 A QUALIFIED SMALL BUSINESS ACTIVITY.—An activity

10 may elect to be treated for all taxable years as other than

11 a qualified small business activity. Such election shall be

12 made on or before the due date of the activity’s return

13 (determined without regard to extensions) for the later

14 of—

15 ‘‘(1) the first taxable year that the activity is

16 a qualified small business activity, or

17 ‘‘(2) the first taxable year beginning after De18 cember 31, 1992.

19 ‘‘(g) REGULATIONS.—The Secretary shall prescribe

20 such regulations as may be necessary or appropriate to

21 carry out the purposes of this section.’’.

22 (b) CLERICAL AMENDMENT.—The table of sections

23 for part VI of subchapter A of chapter 1 is amended by

24 inserting after the item relating to section 58 the following

25 new item:

‘‘Sec. 58A. Special exceptions for small businesses.’’
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1 SEC. 104. INCREASE IN PERMITTED NUMBER OF SUB2 CHAPTER S SHAREHOLDERS.

3 Subparagraph (A) of section 1361(b)(1) (defining

4 small business corporation) is amended by striking ‘‘35’’

5 and inserting ‘‘50’’.

6 TITLE II—ACCOUNTING

7 PROVISIONS

8 SEC. 201. INFLATION-ADJUSTED FIFO INVENTORY METHOD

9 FOR CERTAIN SMALL BUSINESSES.

10 (a) GENERAL RULE.—Subpart D of part II of

11 subchapter E of chapter 1 (relating to inventories) is

12 amended by adding at the end thereof the following new

13 section:

14 ‘‘SEC. 475. INFLATION-ADJUSTED FIFO INVENTORY METH15 OD FOR CERTAIN SMALL BUSINESSES.

16 ‘‘(a) GENERAL RULE.—An eligible small business

17 may elect to use the inflation-adjusted FIFO inventory

18 method for purposes of valuing all of its inventories.

19 ‘‘(b) INFLATION-ADJUSTED FIFO INVENTORY

20 METHOD OF VALUING INVENTORIES.—For purposes of

21 this section—

22 ‘‘(1) IN GENERAL.—The inflation-adjusted

23 FIFO inventory method of valuing inventories is a

24 method of valuing inventories under which—
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1 ‘‘(A) the taxpayer maintains its inventory

2 under the first-in, first-out method authorized

3 by section 471, and

4 ‘‘(B) cost of goods sold is increased each

5 taxable year by an amount computed by mul6 tiplying the applicable Consumer Price Index

7 increase by so much of the total beginning of

8 the year FIFO inventory (computed in subpara9 graph (A)) as does not exceed the total ending

10 of the year FIFO inventory.

11 ‘‘(2) APPLICABLE CONSUMER PRICE INDEX IN12 CREASE.—The term ‘applicable Consumer Price

13 Index increase’ means the percentage increase (if

14 any) in the Consumer Price Index for all-urban con15 sumers published by the Department of Labor dur16 ing the calendar year ending with or within the tax17 able year of the taxpayer.

18 ‘‘(c) ELIGIBLE SMALL BUSINESS.—For purposes of

19 this section, a taxpayer is an eligible small business for

20 any taxable year if the average annual gross receipts of

21 the taxpayer for the 3 preceding taxable years do not ex22 ceed $10,000,000. For purposes of the preceding sentence,

23 rules similar to the rules of paragraphs (2) and (3) of sec24 tion 448(c) shall apply.
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1 ‘‘(d) 6-YEAR AVERAGING FOR INCREASES IN INVEN2 TORY VALUE.—The beginning inventory for the first tax3 able year for which the method described in subsection (b)

4 is used (and for all subsequent years that the method is

5 used) shall be valued at cost. Any change in the inventory

6 amount resulting from the application of the preceding

7 sentence shall be taken into account ratably in each of

8 the 6 taxable years beginning with the first taxable year

9 for which the method described in subsection (b) is first

10 used.

11 ‘‘(e) SPECIAL RULES.—For purposes of this sec12 tion—

13 ‘‘(1) ELECTION.—

14 ‘‘(A) IN GENERAL.—The election under

15 this section may be made without the consent

16 of the Secretary.

17 ‘‘(B) PERIOD TO WHICH ELECTION AP18 PLIES.—The election under this section shall

19 apply—

20 ‘‘(i) to the taxable year for which it is

21 made, and

22 ‘‘(ii) to all subsequent taxable years

23 for which the taxpayer is an eligible small

24 business, unless the taxpayer secures the
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1 consent of the Secretary to the revocation

2 of such election.

3 ‘‘(2) CHANGES IN METHOD OF ACCOUNTING.—

4 ‘‘(A) TAXPAYERS CHANGING FROM LIFO

5 TO THE METHOD UNDER THIS SECTION.—In

6 the case of a change from a LIFO method

7 under section 472 or 474 to an election under

8 this section—

9 ‘‘(i) beginning inventory shall be re10 stated to FIFO as described in subsection

11 (b), and

12 ‘‘(ii) the difference between restated

13 inventory computed in clause (i) and the

14 basis of the taxpayer’s inventory computed

15 under LIFO will be treated as an increase

16 to basis of inventory with no corresponding

17 increase to income.

18 ‘‘(B) TAXPAYERS CHANGING FROM THE

19 METHOD UNDER THIS SECTION TO LIFO.—A

20 taxpayer changing its method of accounting to

21 LIFO from the method prescribed in this sec22 tion—

23 ‘‘(i) may change its method of ac24 counting without the consent of the Com25 missioner, provided the taxpayer has not
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1 used the LIFO method within the past six

2 taxable years, and

3 ‘‘(ii) must comply with section 472

4 and the regulations thereunder regarding

5 the adoption of LIFO.

6 ‘‘(C) TAXPAYERS CHANGING FROM THE

7 METHOD UNDER THIS SECTION TO FIFO.—A

8 taxpayer changing its method of accounting to

9 FIFO from the method prescribed in this sec10 tion may change its method of accounting with11 out the consent of the Commissioner.

12 ‘‘(f) REGULATIONS.—The Secretary shall be author13 ized to prescribe regulations necessary to carry out the

14 purposes of this section.’’.

15 (b) CLERICAL AMENDMENT.—The table of sections

16 for subpart D of part II of subchapter E of chapter 1

17 is amended by adding at the end thereof the following new

18 item:

‘‘Sec. 475. Inflation-adjusted FIFO method for certain small businesses.’’

19 SEC. 202. EXEMPT SMALL BUSINESS FROM THE UNIFORM

20 CAPITALIZATION RULES.

21 (a) AMENDMENTS TO SECTION 263A.—

22 (1) IN GENERAL.—Subsection (c) of section

23 263A is amended by adding at the end thereof the

24 following new paragraph:
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1 ‘‘(7) TAXPAYERS WITH GROSS RECEIPTS OF

2 $10,000,000 OR LESS.—

3 ‘‘(A) IN GENERAL.—This section shall not

4 apply to any taxpayer if the average annual

5 gross receipts of the taxpayer (or any prede6 cessor) for the 3-taxable year period ending

7 with the taxable year preceding such taxable

8 year do not exceed $10,000,000. For purposes

9 of the preceding sentence, rules similar to the

10 rules of paragraphs (2) and (3) of section

11 448(c) shall apply.

12 ‘‘(B) CHANGES IN METHOD OF ACCOUNT13 ING.—Except as otherwise provided by the Sec14 retary through regulations (or other administra15 tive guidance), a taxpayer changing its method

16 of accounting by reason of satisfying or failing

17 to satisfy the $10,000,000 average annual gross

18 receipts test in subparagraph (A) must obtain

19 the consent of the Secretary to change its meth20 od of accounting.’’.

21 (2) CONFORMING AMENDMENTS.—

22 (A) Paragraph 2 of section 263A(b) is

23 amended to read as follows:
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1 ‘‘(2) PROPERTY ACQUIRED FOR RESALE.—Real

2 or personal property described in section 1221(1)

3 which is acquired by the taxpayer for resale.’’

4 (B) Subsection (i)(2) of section 263A is

5 amended by striking ‘‘in the case of property

6 described in subsection (b)(2)’’.

7 (b) AMENDMENT TO SECTION 471.—Section 471 (re8 lating to general rules for inventories) is amended by re9 designating subsection (b) as subsection (c) and inserting

10 after subsection (a) the following new subsection:

11 ‘‘(b) COST CAPITALIZATION FOR TAXPAYERS WITH

12 GROSS RECEIPTS THAT DO NOT EXCEED $1,000,000.—

13 ‘‘(1) IN GENERAL.—If a taxpayer’s average an14 nual gross receipts for its immediately preceding

15 three taxable years do not exceed $1,000,000 the

16 taxpayer shall not be required to include in its in17 ventory costs any indirect costs incurred. For pur18 poses of the preceding sentence, indirect costs in19 clude all costs other than direct costs of acquiring

20 or producing the inventory. For purposes of this

21 subsection, rules similar to the rules of paragraphs

22 (2) and (3) of section 448(c) shall apply in deter23 mining whether a taxpayer has average annual gross

24 receipts that do not exceed $1,000,000.
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1 ‘‘(2) CHANGES IN METHOD OF ACCOUNTING.—

2 Except as otherwise provided by the Secretary

3 through regulations (or other administrative guid4 ance), a taxpayer changing its method of accounting

5 by reason of satisfying or failing the $1,000,000 av6 erage annual gross receipts test in paragraph (1)

7 must obtain the consent of the Secretary to change

8 its method of accounting for indirect costs under

9 paragraph (1).’’.

10 (c) AMENDMENT TO SECTION 263.—Section 263 (re11 lating to capital expenditures) is amended by adding at

12 the end thereof the following new subsection:

13 ‘‘(j) COST CAPITALIZATION FOR TAXPAYERS WITH

14 GROSS RECEIPTS THAT DO NOT EXCEED $1,000,000.—

15 If a taxpayer’s average annual gross receipts for its imme16 diately preceding 3 taxable years do not exceed

17 $1,000,000, the taxpayer shall not be required to capital18 ize any indirect costs incurred in the taxpayer’s current

19 taxable year to its capital expenditures. For purposes of

20 the preceding sentence, indirect costs include all costs

21 other than direct costs. For purposes of this subsection,

22 rules similar to the rules of paragraphs (2) and (3) of sec23 tion 448(c) shall apply in determining whether a taxpayer

24 has average annual gross receipts that do not exceed

25 $1,000,000.’’.
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1 (d) EFFECTIVE DATES.—

2 (1) SPECIAL RULE APPLICABLE TO INVENTORY

3 PROPERTY.—

4 (A) IN GENERAL.—The amendments made

5 by subsections (a) and (b) shall apply to taxable

6 years beginning after December 31, 1992.

7 (B) CHANGE IN METHOD OF ACCOUNT8 ING.—If the taxpayer is permitted by the

9 amendments made by this section to change its

10 method of accounting with respect to inventory

11 for its 1st taxable year beginning after Decem12 ber 31, 1992—

13 (i) such change shall be treated as ini14 tiated by the taxpayer,

15 (ii) such change shall be treated as

16 made with the consent of the Secretary,

17 (iii) the net amount of adjustments

18 required by section 481 of the Internal

19 Revenue Code of 1986 shall be taken into

20 account over a period not longer than 3

21 years.

22 In applying clause (iii), however, the Secretary

23 may prescribe any other administrative proce24 dures (for example, a cut-off method) for

25 effecting the permitted method change which
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1 would prevent duplications or omissions of in2 come or deductions, and thus make adjustments

3 under section 481 unnecessary.

4 (2) NONINVENTORY EFFECTIVE DATE.—The

5 amendments made by subsection (c) shall apply with

6 respect to costs incurred in taxable years beginning

7 after December 31, 1992.

8 SEC. 203. EXEMPTION OF SMALL BUSINESSES FROM LONG9 TERM CONTRACT RULES.

10 (a) GENERAL RULE.—

11 (1) Paragraph (1) of section 460(e) is amended

12 to read as follows:

13 ‘‘(1) IN GENERAL.—

14 ‘‘(A) Subsections (a), (b), and (c) (1) and

15 (2) shall not apply to any home construction

16 contract.

17 ‘‘(B) This section shall not apply to any

18 other contract entered into by a taxpayer whose

19 average annual gross receipts for the 3 taxable

20 years immediately preceding the taxable year in

21 which such contract is entered into do not ex22 ceed $10,000,000.

23 In the case of a home construction contract with re24 spect to which the requirements of subparagraph
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1 (B) are not met, section 263A shall apply notwith2 standing subsection (c)(4) thereof.’’.

3 (2) The subsection heading for subsection (e) of

4 section 460 is amended by striking ‘‘CONSTRUC5 TION’’.

6 (b) AMT EXCEPTION FOR SMALL CONTRACTORS.—

7 Paragraph (3) of section 56(a) is amended to read as fol8 lows:

9 ‘‘(3) TREATMENT OF CERTAIN LONG-TERM

10 CONTRACTS.—In the case of any long-term contract

11 entered into by the taxpayer on or after March 1,

12 1986, the taxable income from such contract shall be

13 determined under the percentage of completion

14 method of accounting (as modified by section

15 460(b)). The preceding sentence shall not apply to

16 any contract described in section 460(e)(1).’’.

17 (c) AMENDMENTS TO SECTION 451.—Section 451 is

18 amended by adding at the end thereof the following new

19 subsection:

20 ‘‘(h) SPECIAL RULE FOR DETERMINING INCOME

21 FROM A LONG-TERM CONTRACT FOR ELIGIBLE TAX22 PAYERS.—

23 ‘‘(1) IN GENERAL.—A taxpayer shall not be re24 quired to allocate indirect costs to any long-term
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1 contract entered into during a taxable year for which

2 the taxpayer is an eligible taxpayer.

3 ‘‘(2) ELIGIBLE TAXPAYER.—For purposes of

4 this subsection, an ‘eligible taxpayer’ is a taxpayer

5 whose average annual gross receipts for the 3 tax6 able years immediately preceding the current taxable

7 year do not exceed $1,000,000. For purposes of the

8 preceding sentence, rules similar to the rules of

9 paragraphs (2) and (3) of section 448(c) shall apply

10 in determining whether a taxpayer has average an11 nual gross receipts that do not exceed $1,000,000.

12 ‘‘(3) INDIRECT COSTS.—For purposes of this

13 subsection, indirect costs are all costs other than di14 rect costs.’’

15 (d) EFFECTIVE DATE.—The amendments made by

16 this section shall apply to contracts entered into in taxable

17 years beginning after December 31, 1992.

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