I
104TH CONGRESS
1ST SESSION
H. R. 1661
To permit partnerships and S corporations to elect taxable years other than
required years.
IN THE HOUSE OF REPRESENTATIVES
MAY 17, 1995
Mr. SHAW introduced the following bill; which was referred to the Committee
on Ways and Means
A BILL
To permit partnerships and S corporations to elect taxable
years other than required years.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Small Business Tax Flexibility Act of 1995’’.
SEC. 2. ELECTION OF TAXABLE YEAR.
Part I of subchapter E of chapter 1 of the Internal
Revenue Code of 1986 (relating to accounting periods) is
amended by redesignating section 444 as section 445 and
by inserting after section 443 the following new section:
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‘‘SEC. 444. PARTNERSHIPS AND S CORPORATIONS MAY
ELECT ANY TAXABLE YEAR.
‘‘(a) GENERAL RULE.—Except as otherwise provided
in this section, a partnership or S corporation may elect
to have a taxable year other than the required taxable
year.
‘‘(b) EFFECT OF ELECTION.—If an entity makes an
election under subsection (a), then—
‘‘(1) the entity shall pay estimated tax at the
applicable rate on behalf of the owners as provided
in this section,
‘‘(2) if there is any underpayment of estimated
tax by the entity, the entity shall pay a penalty de-
termined under section 6654A, and
‘‘(3) in the manner provided in sections 35 and
6654, the owners may credit against their respective
liabilities for tax their allocable shares of the esti-
mated tax payments made by the entity.
‘‘(c) DEFINITIONS.—For purposes of this section,
section 35, and section 6654A:
‘‘(1) ENTITY.—The term ‘entity’ means a part-
nership or S corporation, as the case may be.
‘‘(2) OWNER.—The term ‘owner’ means a part-
ner in a partnership or a shareholder in an S cor-
poration, as the case may be.
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‘‘(3) REQUIRED TAXABLE YEAR.—The term ‘re-
quired taxable year’ means the taxable year deter-
mined under section 706(b) or 1378.
‘‘(4) APPLICABLE RATE.—The term ‘applicable
rate’ means—
‘‘(A) except as provided in subparagraph
(B), 34 percent, and
‘‘(B) in the case of a high average income
entity (as defined in subsection (l), 39.6 per-
cent.
‘‘(d) REQUIRED QUARTERLY INSTALLMENTS.—
‘‘(1) REQUIREMENT.—An entity shall pay a re-
quired installment for each quarter of a taxable year
for which an election under subsection (a) is in ef-
fect.
‘‘(2) NO REQUIRED PAYMENTS WHERE ENTI-
TY’S LIABILITY IS LESS THAN $5,000.—
‘‘(A) IN GENERAL.—An entity shall not be
required to make estimated payments under
this section for any taxable year for which (but
for this subparagraph) its aggregate liability
under this section would be less than $5,000.
‘‘(B) ENTITIES
UNDER
COMMON
CON-
TROL.—If 2 or more entities are under common
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control, such entities shall be treated as one en-
tity for purposes of applying subparagraph (A).
‘‘(C) COMMON
CONTROL
DEFINED.—For
purposes of subparagraph (B), two entities are
under common control if the same person or
persons own more than 50 percent of the cap-
ital interest or profits interest in the partner-
ship or more than 50 percent in value of the
outstanding stock of the S corporation, as the
case may be. For purposes of the preceding sen-
tence, the constructive ownership rules of sec-
tion 267(c) shall apply except that such rules
shall be applied to interests in partnerships as
well as to stock.
‘‘(3) AMOUNT.—The amount of the required in-
stallment for any quarter shall be determined under
whichever of the following is the entity’s applicable
method for that quarter.
‘‘(A) The 110 percent method.
‘‘(B) The 100 percent method.
‘‘(C) The annualized income method.
‘‘(4) APPLICABLE
METHOD.—Unless the 100
percent method or the annualized income method
applies to a quarter by reason of subsection (e)(4)
or a timely selection under subsection (f) or (g), the
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applicable method for an entity for any quarter shall
be the 110 percent method.
‘‘(e) 110-PERCENT METHOD.—
‘‘(1) IN GENERAL.—The required quarterly in-
stallment under the 110 percent method shall be 1⁄4
of 110 percent of the product of—
‘‘(A) the entity’s applicable income for its
base year, and
‘‘(B) the applicable rate.
‘‘(2) C CORPORATION FOR BASE YEAR.—
‘‘(A) IN GENERAL.—For purposes of this
subsection, if an S corporation was a C cor-
poration for its base year, its taxable income for
its base year shall be substituted for its applica-
ble income.
‘‘(3) BASE
YEAR
DEFINED—For purposes of
this subsection, the term ‘base year’ means the most
recent prior taxable year containing 12 months.
‘‘(4) 110-PERCENT
METHOD
NOT
AVAILABLE
WHERE LARGE INCREASE IN INCOME.—
‘‘(A) IN GENERAL.—If an entity’s applica-
ble income for the taxable year exceeds its ap-
plicable income for the base year by more than
$750,000, the 110-percent method will not
apply to the entity for the taxable year. Instead,
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the 110-percent method shall apply unless the
entity selects the annualized income method.
‘‘(B) ENTITIES
UNDER
COMMON
CON-
TROL.—If 2 or more entities are under common
control (as defined in subsection (d)(2)(C)),
such entities shall be treated as one entity for
purposes of applying subparagraph (A).
‘‘(f) 100-PERCENT METHOD.—
‘‘(1) IN GENERAL.—The required quarterly in-
stallment under the 100-percent method shall be 1⁄4
of 100 percent of the product of—
‘‘(A) the entity’s applicable income for the
current taxable year, and
‘‘(B) the applicable rate.
‘‘(2) 100-PERCENT
METHOD
MUST
BE
SE-
LECTED BY DUE DATE FOR FIRST QUARTER.—Ex-
cept as provided in subsection (e)(4), the 100-per-
cent method shall apply to an entity’s taxable year
only if the entity selects that method for that year
on or before the due date for the first quarterly in-
stallment for that year.
‘‘(g) ANNUALIZED INCOME METHOD.—
‘‘(1) IN GENERAL.—The required quarterly in-
stallment under the annualized income method shall
be 1⁄4 of the product of—
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‘‘(A) the entity’s annualized applicable in-
come (determined under subsection (h)(6)), and
‘‘(B) the applicable rate.
‘‘(2) ADJUSTMENTS IN AMOUNT.—The required
installment under this subsection for any quarter
shall be increased or decreased by any amount by
which the entity’s quarterly installments for prior
quarters in the year were higher or lower than such
installments would have been if computed under this
subsection using the annualized applicable income
for the current quarter.
‘‘(3) TIME
FOR
SELECTING
METHOD.—The
annualized income method shall apply to an entity
for a quarter only if the entity selects that method
on or before the due date for such quarter.
‘‘(4) CONSISTENCY
FOR
REMAINING
QUAR-
TERS.—If an entity selects the annualized income
method for any quarter, that method shall also apply
to the remaining quarters in the entity’s taxable
year.
‘‘(h) APPLICABLE INCOME.—
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the applicable income for any taxable year shall
be the net amount (not less than zero) determined—
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‘‘(A) by taking into account the entity’s
items in the manner and with the exceptions
provided in section 703(a) or 1363(b), as the
case may be, and
‘‘(B) by making the further adjustments
provided in paragraphs (2), (3), (4), and (5) of
this subsection.
‘‘(2) CERTAIN DEDUCTIONS ALLOWED.—In de-
termining applicable income the following amounts
shall be allowed as deductions:
‘‘(A) Contributions to organizations de-
scribed in section 170(c).
‘‘(B) Taxes described in section 901(c)
paid or accrued to foreign countries or posses-
sions of the United States.
‘‘(3) CERTAIN
LIMITATIONS
DISREGARDED.—
For purposes of paragraphs (1) and (2), any limita-
tion on the amount of any item which may be taken
into account for purposes of computing the taxable
income of a partner or shareholder shall be dis-
regarded.
‘‘(4) GUARANTEED
PAYMENTS
TO
PARTNERS
NOT DEDUCTED.—In determining applicable income
a guaranteed payment to a partner shall not be
treated as an item of deduction.
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SEC. 9 EFFECTIVE DATE.
Except as provided in subsections (b) and (c) or sec-
tion 6, the amendments made by this Act shall apply to
taxable years beginning after December 31, 1995.
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