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, 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 businesses.

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 withholding.

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-employed

(A)

In general

The term employee includes an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals). (B)

Limitation

The amount which may be excluded under subsection (a) with respect to a participant in a cafeteria plan by reason of being an employee under subparagraph (A) 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 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 following new subsection:

(f)

Employee includes self-employed

(1)

In general

For purposes of this section, 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 subsection (a) or (b) with respect to an individual treated 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:

(g)

Employee includes self-employed

(1)

In general

For purposes of this section, 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 exceed the employee’s earned income (within the meaning 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 accident and health plans

(A)

In general

Section 106 is amended by adding at the end the following new subsection:

(c)

Employer to include self-employed

(1)

In general

For purposes of this section, 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 individual treated 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 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: “Paragraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer participates in any subsidized health plan maintained by any employer (other than an employer described in section 401(c)(4)) of the taxpayer or the spouse of the taxpayer. (c)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

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 premiums for any qualified long-term care insurance contract (as defined in section 7702B) to the extent the amount 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.

Amortization of certain intangibles acquired from eligible small businesses

(a)

In general

Section 197 (relating to amortization of goodwill and certain other intangibles) is amended by redesignating subsection (g) as subsection (h) and inserting 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 intangible

For purposes of this subsection, the term qualified amortizable section 197 intangible means any amortizable section 197 intangible which is acquired in a transaction (or series of transactions) involving the acquisition of assets constituting 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 adjusted 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 purposes 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 such manner as the Secretary prescribes.

For purposes of the preceding sentence, the term controlled group has the meaning 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 corporations

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 corporation 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 beneficiary and the fiduciary in the manner prescribed by the Secretary. Any amount so apportioned to a beneficiary shall be taken into account 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 amortizable 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.

Increase in exclusion of gain from qualified 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

Subparagraph (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.

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 paragraph:

(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 during 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.

Qualified small businesses election of taxable 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 accounting periods) is amended by inserting after section 444 the following new section:

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 subsection (a) shall be terminated on the earliest of— (A) the first day of the taxable year following 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 terminates. (2)

Gross receipts test

For purposes of paragraph (1), an entity fails to meet the gross receipts test if the entity fails to meet the gross receipts 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 beginning of the taxable year determined under paragraph (4) shall be includible in income ratably 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 (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 percent of the entity is owned by any person who previously 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. (3)

Required taxable year

The term required 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 inserting 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.

(d)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

Increase in maximum number of S corporation 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.

Government contracts with small businesses 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 purposes 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 of the Tax Increase Prevention and Reconciliation Act of 2005.