I 
110TH CONGRESS 
1ST SESSION 
H. R. 46 
To amend the Internal Revenue Code of 1986 to provide tax incentives 
for small businesses, and for other purposes. 
IN THE HOUSE OF REPRESENTATIVES 
JANUARY 4, 2007 
Ms. VELA´ZQUEZ 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 provide 
tax incentives for small businesses, and for other purposes. 
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled, 
SECTION 1. SHORT TITLE, ETC. 
(a) SHORT TITLE.—This Act may be cited as the 
‘‘Small Business Tax Fairness and Simplification Act of 
2007’’. 
(b) REFERENCES TO INTERNAL REVENUE CODE.— 
Except as otherwise expressly provided, whenever in this 
Act an amendment or repeal is expressed in terms of an 
amendment to, or repeal of, a section or other provision, 
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the reference shall be considered to be made to a section 
or other provision of the Internal Revenue Code of 1986. 
(c) TABLE OF CONTENTS.—The table of contents for 
this Act is as follows: 
Sec. 1. Short title, etc. 
Sec. 2. Application of cafeteria plan rules, etc., to self-employed individuals. 
Sec. 3. Long-term care insurance permitted to be offered under cafeteria plans 
and flexible spending arrangements. 
Sec. 4. Amortization of certain intangibles acquired from eligible small busi-
nesses. 
Sec. 5. Increase in exclusion of gain from qualified small business stock. 
Sec. 6. Standard home office deduction. 
Sec. 7. Qualified small businesses election of taxable year ending in a month 
from April to November. 
Sec. 8. Increase in maximum number of S corporation shareholders. 
Sec. 9. Government contracts with small businesses not subject to tax with-
holding. 
SEC. 2. APPLICATION OF CAFETERIA PLAN RULES, ETC., TO 
SELF-EMPLOYED INDIVIDUALS. 
(a) IN GENERAL.—Section 125(d) (defining cafeteria 
plan) is amended by adding at the end the following new 
paragraph: 
‘‘(3) 
EMPLOYEE
TO
INCLUDE
SELF-EM-
PLOYED.— 
‘‘(A) IN GENERAL.—The term ‘employee’ 
includes an individual who is an employee with-
in the meaning of section 401(c)(1) (relating to 
self-employed individuals). 
‘‘(B) LIMITATION.—The amount which 
may be excluded under subsection (a) with re-
spect to a participant in a cafeteria plan by rea-
son of being an employee under subparagraph 
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(A) shall not exceed the employee’s earned in-
come (within the meaning of section 401(c)) de-
rived from the trade or business with respect to 
which the cafeteria plan is established.’’ 
(b) APPLICATION
TO BENEFITS WHICH MAY BE 
PROVIDED UNDER CAFETERIA PLAN.— 
(1) GROUP-TERM
LIFE
INSURANCE.—Section 
79 (relating to group-term life insurance provided to 
employees) is amended by adding at the end the fol-
lowing new subsection: 
‘‘(f) EMPLOYEE INCLUDES SELF-EMPLOYED.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘employee’ includes an individual who 
is an employee within the meaning of section 
401(c)(1) (relating to self-employed individuals). 
‘‘(2) LIMITATION.—The amount which may be 
excluded under the exceptions contained in sub-
section (a) or (b) with respect to an individual treat-
ed as an employee by reason of paragraph (1) shall 
not exceed the employee’s earned income (within the 
meaning of section 401(c)) derived from the trade or 
business with respect to which the individual is so 
treated.’’ 
(2) ACCIDENT AND HEALTH PLANS.—Section 
105(g) is amended to read as follows: 
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‘‘(g) EMPLOYEE INCLUDES SELF-EMPLOYED.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘employee’ includes an individual who 
is an employee within the meaning of section 
401(c)(1) (relating to self-employed individuals). 
‘‘(2) LIMITATION.—The amount which may be 
excluded under this section by reason of subsection 
(b) or (c) with respect to an individual treated as an 
employee by reason of paragraph (1) shall not ex-
ceed the employee’s earned income (within the mean-
ing of section 401(c)) derived from the trade or 
business with respect to which the accident or health 
insurance was established.’’ 
(3) CONTRIBUTIONS BY EMPLOYERS TO ACCI-
DENT AND HEALTH PLANS.— 
(A) IN GENERAL.—Section 106 is amended 
by adding at the end the following new sub-
section: 
‘‘(c) EMPLOYER TO INCLUDE SELF-EMPLOYED.— 
‘‘(1) IN GENERAL.—For purposes of this sec-
tion, the term ‘employee’ includes an individual who 
is an employee within the meaning of section 
401(c)(1) (relating to self-employed individuals). 
‘‘(2) LIMITATION.—The amount which may be 
excluded under subsection (a) with respect to an in-
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dividual treated as an employee by reason of para-
graph (1) shall not exceed the employee’s earned in-
come (within the meaning of section 401(c)) derived 
from the trade or business with respect to which the 
accident or health insurance was established.’’ 
(B) CLARIFICATION OF LIMITATIONS ON OTHER 
COVERAGE.—The 
first 
sentence 
of 
section 
162(l)(2)(B) is amended to read as follows: ‘‘Para-
graph (1) shall not apply to any taxpayer for any 
calendar month for which the taxpayer participates 
in any subsidized health plan maintained by any em-
ployer (other than an employer described in section 
401(c)(4)) of the taxpayer or the spouse of the tax-
payer. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 3. LONG-TERM CARE INSURANCE PERMITTED TO BE 
OFFERED UNDER CAFETERIA PLANS AND 
FLEXIBLE SPENDING ARRANGEMENTS. 
(a) CAFETERIA PLANS.—The last sentence of section 
125(f) (defining qualified benefits) is amended to read as 
follows: ‘‘Such term shall include the payment of pre-
miums for any qualified long-term care insurance contract 
(as defined in section 7702B) to the extent the amount 
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of such payment does not exceed the eligible long-term 
care premiums (as defined in section 213(d)(10)) for such 
contract’’. 
(b) FLEXIBLE SPENDING ARRANGEMENTS.—Section 
106 (relating to contributions by employer to accident and 
health plans), as amended by section 2, is amended by 
striking subsection (c) and redesignating subsection (d) as 
subsection (c). 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years beginning after 
the date of the enactment of this Act. 
SEC. 4. AMORTIZATION OF CERTAIN INTANGIBLES AC-
QUIRED FROM ELIGIBLE SMALL BUSINESSES. 
(a) IN GENERAL.—Section 197 (relating to amortiza-
tion of goodwill and certain other intangibles) is amended 
by redesignating subsection (g) as subsection (h) and in-
serting after subsection (f) the following new subsection: 
‘‘(g) AMORTIZATION
OF INTANGIBLES ACQUIRED 
FROM ELIGIBLE SMALL BUSINESSES.— 
‘‘(1) IN GENERAL.—In the case of any qualified 
amortizable section 197 intangible, subsection (a) 
shall be applied by substituting ‘5-year period’ for 
‘15-year period’. 
‘‘(2) QUALIFIED AMORTIZABLE SECTION 197 IN-
TANGIBLE.—For purposes of this subsection, the 
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term ‘qualified amortizable section 197 intangible’ 
means any amortizable section 197 intangible which 
is acquired in a transaction (or series of trans-
actions) involving the acquisition of assets consti-
tuting a trade or business or substantial portion 
thereof from an eligible small business (as defined in 
section 474(c)) after the date of the enactment of 
this subsection. 
‘‘(3) MAXIMUM AMOUNT PER BUSINESS.— 
‘‘(A) IN
GENERAL.—The aggregate ad-
justed basis of qualified amortizable section 197 
intangibles of each eligible small business which 
the taxpayer may amortize under paragraph (1) 
shall not exceed $5,000,000. 
‘‘(B) ALLOCATION OF DOLLAR AMOUNT.— 
‘‘(i) CONTROLLED GROUP.—For pur-
poses of applying the dollar limitations in 
subparagraph (A)— 
‘‘(I) all component members of a 
controlled group shall be treated as 
one taxpayer, and 
‘‘(II) such dollar limitations shall 
be allocated among the component 
members of such controlled group in 
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such manner as the Secretary pre-
scribes. 
For purposes of the preceding sentence, 
the term ‘controlled group’ has the mean-
ing given to such term by section 1563(a), 
except that ‘more than 50 percent’ shall be 
substituted for ‘at least 80 percent’ each 
place it appears in section 1563(a)(1). 
‘‘(ii) PARTNERSHIPS AND S CORPORA-
TIONS.—In the case of a partnership, the 
dollar limitations in subparagraph (A) 
shall apply with respect to the partnership 
and with respect to each partner. A similar 
rule shall apply in the case of an S cor-
poration and its shareholders. 
‘‘(C) SUBSECTION
NOT
TO
APPLY
TO 
TRUSTS.—This subsection shall not apply to 
trusts. 
‘‘(D) ESTATES.—The benefit of the special 
deduction provided by this subsection shall be 
allowed to estates in the same manner as in the 
case of an individual. The allowable deduction 
shall be apportioned between the income bene-
ficiary and the fiduciary in the manner pre-
scribed by the Secretary. Any amount so appor-
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tioned to a beneficiary shall be taken into ac-
count for purposes of determining the amount 
allowable as a deduction under this subsection 
to such beneficiary.’’. 
(b) EFFECTIVE DATE.—The amendment made by 
this section shall apply to acquisitions of qualified amortiz-
able section 197 intangibles (as defined in section 
197(g)(2) of the Internal Revenue Code of 1986, as added 
by this section) after the date of the enactment of this 
Act. 
SEC. 5. INCREASE IN EXCLUSION OF GAIN FROM QUALI-
FIED SMALL BUSINESS STOCK. 
(a) IN GENERAL.—Paragraph (1) of section 1202(a) 
is amended by striking ‘‘50 percent’’ and inserting ‘‘62.5 
percent’’. 
(b) EMPOWERMENT ZONE BUSINESSES.—Subpara-
graph (A) of section 1202(a)(2) is amended— 
(1) by striking ‘‘60 percent’’ and inserting ‘‘75 
percent’’, and 
(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. 
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SEC. 6. STANDARD HOME OFFICE DEDUCTION. 
(a) IN GENERAL.—Subsection (c) of section 280A 
(relating to disallowance of certain expenses in connection 
with business use of home, rental of vacation homes, etc.) 
is amended by adding at the end the following new para-
graph: 
‘‘(7) STANDARD HOME OFFICE DEDUCTION.— 
Subject to the limitation of paragraph (5), in the 
case of a use described in paragraph (1), (2), or (4), 
and in the case of a use described in paragraph (3) 
where the dwelling unit is used by the taxpayer dur-
ing the taxable year as a residence, the deductions 
allowed under this chapter for the taxable year by 
reason of being attributed to such use shall not be 
less than $2,500.’’. 
(b) EFFECTIVE DATE.—The amendments made by 
this section shall apply to taxable years ending after the 
date of the enactment of this Act. 
SEC. 7. 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: 
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‘‘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 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 
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‘‘(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. 
‘‘(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 
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‘‘(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 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 
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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 ‘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: 
‘‘Sec. 444A. Qualified small businesses election of taxable year ending in a 
month from April to November.’’. 
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(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. 8. 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’’. 
(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. 9. 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 
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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 
of the Tax Increase Prevention and Reconciliation Act of 
2005. 
Æ 
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