(2) by striking ‘‘50 percent’’ and inserting 
‘‘62.5 percent’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to sales or exchanges of qualified 
small business stock in taxable years beginning after the 
date of the enactment of this Act. 
SEC. 8. QUALIFIED SMALL BUSINESSES ELECTION OF TAX-
ABLE 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 ac-
counting 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 
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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 sub-
section (a) shall be terminated on the earliest of— 
‘‘(A) the first day of the taxable year fol-
lowing 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 termi-
nates. 
‘‘(2) GROSS RECEIPTS TEST.—For purposes of 
paragraph (1), an entity fails to meet the gross re-
ceipts test if the entity fails to meet the gross re-
ceipts 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. 
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‘‘(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 be-
ginning of the taxable year determined under 
paragraph (4) shall be includible in income rat-
ably 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 
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‘‘(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 per-
cent of the entity is owned by any person who pre-
viously 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. 
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‘‘(3) REQUIRED TAXABLE YEAR.—The term ‘re-
quired 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 insert-
ing ‘‘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: 
‘‘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 
the date of the enactment of this Act. 
SEC. 9. INCREASE IN MAXIMUM NUMBER OF S CORPORA-
TION SHAREHOLDERS. 
(a) IN GENERAL.—Subparagraph (A) of section 
1361(b)(1) is amended by striking ‘‘100’’ and inserting 
‘‘150’’. 
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(b) EFFECTIVE DATE.—The amendment made by 
subsection (a) shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 10. GOVERNMENT CONTRACTS WITH SMALL BUSI-
NESSES NOT SUBJECT TO TAX WITHHOLDING. 
(a) IN GENERAL.—Paragraph (2) of section 3402(t) 
is amended by striking ‘‘and’’ at the end of subparagraph 
(H), by striking the period at the end of subparagraph 
(I) and inserting ‘‘, and’’, and by adding at the end the 
following new subparagraph: 
‘‘(J) to any specified small business.’’. 
(b) SPECIFIED SMALL BUSINESS.—Subsection (t) of 
section 3402 is amended by redesignating paragraph (3) 
as paragraph (4) and by inserting after paragraph (2) the 
following new paragraph: 
‘‘(3) SPECIFIED
SMALL
BUSINESS.—For pur-
poses of this subsection, the term ‘specified small 
business’ means a corporation or partnership which 
meets the gross receipts test of section 448(c) for 
the taxable year prior to the taxable year in which 
the payment is received (or, in the case of a sole 
proprietorship, which would meet such test if such 
proprietorship were a corporation).’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall take effect as if included in section 511 
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