II

103D CONGRESS

1ST SESSION S. 160

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 SENATE OF THE UNITED STATES

JANUARY 21 (legislative day, JANUARY 5), 1993

Mr. DOLE (for himself, Mr. PACKWOOD, Mr. PRESSLER, Mr. DOMENICI, Mr.

DANFORTH, Mr. NICKLES, Mr. HATCH, Mr. SIMPSON, Mr. WALLOP, Mr.

MACK, Mr. COCHRAN, and Mr. DURENBERGER) introduced the following

bill; which was read twice and referred to the Committee on Finance

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 amend-
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1 ment or repeal is expressed in terms of an amendment

2 to, or repeal of, a section or other provision, the reference

3 shall be considered to be made to a section or other provi4 sion of the Internal Revenue Code of 1986.

5 SEC. 2. PURPOSE.

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

7 laws applicable to small businesses. The resulting decrease

8 in operating costs and increase in economic return will

9 stimulate small business investment and create new jobs.

10 SEC. 3. EFFECTIVE DATE.

11 Except as otherwise provided, the amendments made

12 by this Act shall apply to taxable years beginning after

13 December 31, 1992.

14 TITLE I—INVESTMENT

15 INCENTIVES

16 SEC. 101. INCREASE IN SMALL BUSINESS EXPENSING AL17 LOWANCE.

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

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

20 SEC. 102. ELECTION TO EXPENSE SMALL BUSINESS START21 UP EXPENDITURES.

22 (a) GENERAL RULE.—Section 195 (relating to treat23 ment of start-up expenditures) is amended by redesignat24 ing subsections (c) and (d) as subsections (d) and (e), re-
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1 spectively, and by inserting after subsection (b) the follow2 ing new subsection:

3 ‘‘(c) ELECTION TO EXPENSE.—

4 ‘‘(1) GENERAL RULE.—Notwithstanding sub5 section (a), start-up expenditures may, at the elec6 tion of a qualified taxpayer, be allowed as a deduc7 tion for the taxable year in which the active trade

8 or business begins. The amount of start-up expendi9 tures allowed as a deduction under the preceding

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

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

12 qualified taxpayer if the taxpayer reasonably expects

13 or knows (as of the due date, determined with re14 gard to extensions, for filing its return for the tax15 able year in which the active trade or business be16 gins) that the taxpayer’s gross receipts for the 12-

17 month period beginning with the month in which the

18 active trade or business begins will not exceed (or

19 has not exceeded) $500,000.

20 ‘‘(3) IN ADDITION TO ELECTION TO AMOR21 TIZE.—If the taxpayer makes an election under

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

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

24 deferred expenses as provided in subsection (b).
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1 ‘‘(4) AGGREGATION RULES.—All persons treat2 ed as a single employer under subsection (a) or (b)

3 of section 52 shall be treated as one person for pur4 poses of this subsection.’’.

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

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

7 amended by striking ‘‘subsection (b)’’ and inserting ‘‘sub8 section (b) or (c)’’.

9 SEC. 103. SMALL BUSINESS AMT EXCEPTIONS.

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

11 chapter 1 is amended by inserting after section 58 the fol12 lowing new section:

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

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

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

16 and

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

18 shall not be taken into account for any purpose in comput19 ing alternative minimum taxable income from any quali20 fied small business activity of the taxpayer.

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

22 QUALIFIED SMALL BUSINESS TAXPAYERS.—The adjust23 ments listed in this subsection are the adjustments pro24 vided by the following provisions:

25 ‘‘(1) Section 56(a)(1) (relating to depreciation).
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1 ‘‘(2) Section 56(a)(2) (relating to mining explo2 ration and development costs).

3 ‘‘(3) Section 56(a)(3) (relating to long-term

4 contracts).

5 ‘‘(4) Section 56(a)(5) (relating to pollution con6 trol facilities).

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

8 sales).

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

10 and research expenditures).

11 ‘‘(7) Section 56(c) (relating to special adjust12 ments for corporations).

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

14 QUALIFIED SMALL BUSINESSES.—The preferences listed

15 in this subsection are the preferences provided by the

16 following provisions:

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

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

19 drilling costs).

20 ‘‘(3) Section 57(a)(4) (relating to bad debts

21 reserve).

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

23 depreciation or amortization).

24 ‘‘(d) DEFINITIONS.—
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1 ‘‘(1) QUALIFIED SMALL BUSINESS ACTIVITY.—

2 For purposes of this section, the term ‘qualified

3 small business activity’ means any trade or business

4 activity conducted by an individual or by a corpora5 tion or partnership if such individual or entity (as

6 the case may be) meets the $1,000,000 gross re7 ceipts test of paragraph (3) for all prior taxable

8 years beginning after December 31, 1991.

9 ‘‘(2) $1,000,000 GROSS RECEIPTS TEST.—For

10 purposes of paragraph (1)—

11 ‘‘(A) IN GENERAL.—An individual or en12 tity meets the $1,000,000 gross receipts test of

13 this subsection for any prior taxable year if the

14 average annual gross receipts of such person or

15 entity for the 3-taxable year period ending with

16 such prior taxable year does not exceed

17 $1,000,000.

18 ‘‘(B) AGGREGATION AND SPECIAL

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

20 aggregation and special rules similar to the

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

22 448(c) shall apply in determining whether an

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

24 gross receipts test.
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1 ‘‘(e) FRESH START TRANSITIONAL RULES FOR AN

2 ACTIVITY THAT CEASES TO BE A QUALIFIED SMALL

3 BUSINESS ACTIVITY.—

4 ‘‘(1) IN GENERAL.—If an activity ceases to be

5 a qualified small business activity, the adjustments

6 and preferences with respect to the activity listed in

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

8 alternative minimum taxable income for the taxable

9 year of the cessation and subsequent taxable years

10 by substituting the last day of the last taxable year

11 in which the activity was as a qualified small busi12 ness activity for December 31, 1986, and December

13 31, 1989. Any references to January 1, 1987, or

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

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

16 the taxable year in which the activity ceased to be

17 a qualified small business activity.

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

19 ENACTMENT OF THIS SECTION.—

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

21 amount of any adjustments or preferences with

22 respect to an activity in a taxable year in which

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

24 small business activity, any of the adjustments

25 listed in subsection (b) and previously taken
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1 into account with respect to the activity in a

2 taxable year beginning on or before December

3 31, 1992, shall be disregarded.

4 ‘‘(B) FRESH START BASIS.—As of the first

5 day of the taxable year in which an activity

6 ceases to be a qualified small business activity,

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

8 determining the regular tax shall be used in

9 computing the adjustments and preferences re10 quired under sections 56 and 57.

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

12 A QUALIFIED SMALL BUSINESS ACTIVITY.—An activity

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

14 a qualified small business activity. Such election shall be

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

16 (determined without regard to extensions) for the later

17 of—

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

19 a qualified small business activity, or

20 ‘‘(2) the first taxable year beginning after De21 cember 31, 1992.

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

23 such regulations as may be necessary or appropriate to

24 carry out the purposes of this section.’’.
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1 (b) CLERICAL AMENDMENT.—The table of sections

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

3 inserting after the item relating to section 58 the following

4 new item:

‘‘Sec. 58A. Special exceptions for small businesses.’’.

5 SEC. 104. INCREASE IN PERMITTED NUMBER OF SUB6 CHAPTER S SHAREHOLDERS.

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

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

9 and inserting ‘‘50’’.

10 TITLE II—ACCOUNTING

11 PROVISIONS

12 SEC. 201. INFLATION-ADJUSTED FIFO INVENTORY METHOD

13 FOR CERTAIN SMALL BUSINESSES.

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

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

16 amended by adding at the end thereof the following new

17 section:

18 ‘‘SEC. 475. INFLATION-ADJUSTED FIFO INVENTORY METH19 OD FOR CERTAIN SMALL BUSINESSES.

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

21 may elect to use the inflation-adjusted FIFO inventory

22 method for purposes of valuing all of its inventories.

23 ‘‘(b) INFLATION-ADJUSTED FIFO INVENTORY

24 METHOD OF VALUING INVENTORIES.—For purposes of

25 this section—
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1 ‘‘(1) IN GENERAL.—The inflation-adjusted

2 FIFO inventory method of valuing inventories is a

3 method of valuing inventories under which—

4 ‘‘(A) the taxpayer maintains its inventory

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

6 by section 471, and

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

8 taxable year by an amount computed by mul9 tiplying the applicable Consumer Price Index

10 increase by so much of the total beginning of

11 the year FIFO inventory (computed in subpara12 graph (A)) as does not exceed the total ending

13 of the year FIFO inventory.

14 ‘‘(2) APPLICABLE CONSUMER PRICE INDEX IN15 CREASE.—The term ‘applicable Consumer Price

16 Index increase’ means the percentage increase (if

17 any) in the Consumer Price Index for all-urban con18 sumers published by the Department of Labor dur19 ing the calendar year ending with or within the tax20 able year of the taxpayer.

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

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

23 any taxable year if the average annual gross receipts of

24 the taxpayer for the 3 preceding taxable years do not ex25 ceed $10,000,000. For purposes of the preceding sentence,
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1 rules similar to the rules of paragraphs (2) and (3) of sec2 tion 448(c) shall apply.

3 ‘‘(d) 6-YEAR AVERAGING FOR INCREASES IN INVEN4 TORY VALUE.—The beginning inventory for the first tax5 able year for which the method described in subsection (b)

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

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

8 amount resulting from the application of the preceding

9 sentence shall be taken into account ratably in each of

10 the 6 taxable years beginning with the first taxable year

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

12 used.

13 ‘‘(e) SPECIAL RULES.—For purposes of this sec14 tion—

15 ‘‘(1) ELECTION.—

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

17 this section may be made without the consent

18 of the Secretary.

19 ‘‘(B) PERIOD TO WHICH ELECTION AP20 PLIES.—The election under this section shall

21 apply—

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

23 made, and

24 ‘‘(ii) to all subsequent taxable years

25 for which the taxpayer is an eligible small
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1 business, unless the taxpayer secures the

2 consent of the Secretary to the revocation

3 of such election.

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

5 ‘‘(A) TAXPAYERS CHANGING FROM LIFO

6 TO THE METHOD UNDER THIS SECTION.—In

7 the case of a change from a LIFO method

8 under section 472 or 474 to an election under

9 this section—

10 ‘‘(i) beginning inventory shall be re11 stated to FIFO as described in subsection

12 (b), and

13 ‘‘(ii) the difference between restated

14 inventory computed in clause (i) and the

15 basis of the taxpayer’s inventory computed

16 under LIFO will be treated as an increase

17 to basis of inventory with no corresponding

18 increase to income.

19 ‘‘(B) TAXPAYERS CHANGING FROM THE

20 METHOD UNDER THIS SECTION TO LIFO.—A

21 taxpayer changing its method of accounting to

22 LIFO from the method prescribed in this sec23 tion—

24 ‘‘(i) may change its method of ac25 counting without the consent of the Com-
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1 missioner, provided the taxpayer has not

2 used the LIFO method within the past 6

3 taxable years, and

4 ‘‘(ii) must comply with section 472

5 and the regulations thereunder regarding

6 the adoption of LIFO.

7 ‘‘(C) TAXPAYERS CHANGING FROM THE

8 METHOD UNDER THIS SECTION TO FIFO.—A

9 taxpayer changing its method of accounting to

10 FIFO from the method prescribed in this sec11 tion may change its method of accounting with12 out the consent of the Commissioner.

13 ‘‘(f) REGULATIONS.—The Secretary shall be author14 ized to prescribe regulations necessary to carry out the

15 purposes of this section.’’.

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

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

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

19 item:

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

20 SEC. 202. EXEMPT SMALL BUSINESS FROM THE UNIFORM

21 CAPITALIZATION RULES.

22 (a) AMENDMENTS TO SECTION 263A.—
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1 (1) IN GENERAL.—Subsection (c) of section

2 263A is amended by adding at the end thereof the

3 following new paragraph:

4 ‘‘(7) TAXPAYERS WITH GROSS RECEIPTS OF

5 $10,000,000 OR LESS.—

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

7 apply to any taxpayer if the average annual

8 gross receipts of the taxpayer (or any prede9 cessor) for the 3-taxable year period ending

10 with the taxable year preceding such taxable

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

12 of the preceding sentence, rules similar to the

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

14 448(c) shall apply.

15 ‘‘(B) CHANGES IN METHOD OF ACCOUNT16 ING.—Except as otherwise provided by the Sec17 retary through regulations (or other administra18 tive guidance), a taxpayer changing its method

19 of accounting by reason of satisfying or failing

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

21 receipts test in subparagraph (A) must obtain

22 the consent of the Secretary to change its meth23 od of accounting.’’.

24 (2) CONFORMING AMENDMENTS.—
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1 (A) Paragraph 2 of section 263A(b) is

2 amended to read as follows:

3 ‘‘(2) PROPERTY ACQUIRED FOR RESALE.—Real

4 or personal property described in section 1221(1)

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

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

7 amended by striking ‘‘in the case of property

8 described in subsection (b)(2)’’.

9 (b) AMENDMENT TO SECTION 471.—Section 471 (re10 lating to general rules for inventories) is amended by re11 designating subsection (b) as subsection (c) and inserting

12 after subsection (a) the following new subsection:

13 ‘‘(b) COST CAPITALIZATION FOR TAXPAYERS WITH

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

15 ‘‘(1) IN GENERAL.—If a taxpayer’s average an16 nual gross receipts for its immediately preceding

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

18 taxpayer shall not be required to include in its in19 ventory costs any indirect costs incurred. For pur20 poses of the preceding sentence, indirect costs in21 clude all costs other than direct costs of acquiring

22 or producing the inventory. For purposes of this

23 subsection, rules similar to the rules of paragraphs

24 (2) and (3) of section 448(c) shall apply in deter-
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1 mining whether a taxpayer has average annual gross

2 receipts that do not exceed $1,000,000.

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

4 Except as otherwise provided by the Secretary

5 through regulations (or other administrative guid6 ance), a taxpayer changing its method of accounting

7 by reason of satisfying or failing the $1,000,000 av8 erage annual gross receipts test in paragraph (1)

9 must obtain the consent of the Secretary to change

10 its method of accounting for indirect costs under

11 paragraph (1).’’.

12 (c) AMENDMENT TO SECTION 263.—Section 263 (re13 lating to capital expenditures) is amended by adding at

14 the end thereof the following new subsection:

15 ‘‘(j) COST CAPITALIZATION FOR TAXPAYERS WITH

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

17 If a taxpayer’s average annual gross receipts for its imme18 diately preceding 3 taxable years do not exceed

19 $1,000,000, the taxpayer shall not be required to capital20 ize any indirect costs incurred in the taxpayer’s current

21 taxable year to its capital expenditures. For purposes of

22 the preceding sentence, indirect costs include all costs

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

24 rules similar to the rules of paragraphs (2) and (3) of sec25 tion 448(c) shall apply in determining whether a taxpayer
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1 has average annual gross receipts that do not exceed

2 $1,000,000.’’.

3 (d) EFFECTIVE DATES.—

4 (1) SPECIAL RULE APPLICABLE TO INVENTORY

5 PROPERTY.—

6 (A) IN GENERAL.—The amendments made

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

8 years beginning after December 31, 1992.

9 (B) CHANGE IN METHOD OF ACCOUNT10 ING.—If the taxpayer is permitted by the

11 amendments made by this section to change its

12 method of accounting with respect to inventory

13 for its 1st taxable year beginning after Decem14 ber 31, 1992—

15 (i) such change shall be treated as ini16 tiated by the taxpayer,

17 (ii) such change shall be treated as

18 made with the consent of the Secretary,

19 (iii) the net amount of adjustments

20 required by section 481 of the Internal

21 Revenue Code of 1986 shall be taken into

22 account over a period not longer than 3

23 years.

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

25 may prescribe any other administrative proce-
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1 dures (for example, a cut-off method) for

2 effecting the permitted method change which

3 would prevent duplications or omissions of in4 come or deductions, and thus make adjustments

5 under section 481 unnecessary.

6 (2) NONINVENTORY EFFECTIVE DATE.—The

7 amendments made by subsection (c) shall apply with

8 respect to costs incurred in taxable years beginning

9 after December 31, 1992.

10 SEC. 203. EXEMPTION OF SMALL BUSINESSES FROM LONG11 TERM CONTRACT RULES.

12 (a) GENERAL RULE.—

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

14 to read as follows:

15 ‘‘(1) IN GENERAL.—

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

17 (2) shall not apply to any home construction

18 contract.

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

20 other contract entered into by a taxpayer whose

21 average annual gross receipts for the 3 taxable

22 years immediately preceding the taxable year in

23 which such contract is entered into do not ex24 ceed $10,000,000.
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1 In the case of a home construction contract with re2 spect to which the requirements of subparagraph

3 (B) are not met, section 263A shall apply notwith4 standing subsection (c)(4) thereof.’’.

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

6 section 460 is amended by striking ‘‘CONSTRUC7 TION’’.

8 (b) AMT EXCEPTION FOR SMALL CONTRACTORS.—

9 Paragraph (3) of section 56(a) is amended to read as fol10 lows:

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

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

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

14 1986, the taxable income from such contract shall be

15 determined under the percentage of completion

16 method of accounting (as modified by section

17 460(b)). The preceding sentence shall not apply to

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

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

20 amended by adding at the end thereof the following new

21 subsection:

22 ‘‘(h) SPECIAL RULE FOR DETERMINING INCOME

23 FROM A LONG-TERM CONTRACT FOR ELIGIBLE TAX24 PAYERS.—
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1 ‘‘(1) IN GENERAL.—A taxpayer shall not be re2 quired to allocate indirect costs to any long-term

3 contract entered into during a taxable year for which

4 the taxpayer is an eligible taxpayer.

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

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

7 whose average annual gross receipts for the 3 tax8 able years immediately preceding the current taxable

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

10 preceding sentence, rules similar to the rules of

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

12 in determining whether a taxpayer has average an13 nual gross receipts that do not exceed $1,000,000.

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

15 subsection, indirect costs are all costs other than di16 rect costs.’’.

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

18 this section shall apply to contracts entered into in taxable

19 years beginning after December 31, 1992.

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