[Congressional Record Volume 152, Number 36 (Tuesday, March 28, 2006)]
[Senate]
[Pages S2469-S2470]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Ms. SNOWE (for herself and Mrs. Lincoln):
  S. 2462. A bill to permit startup partnership and S corporations to 
elect taxable years other than required years; to the Committee on 
Finance.
  Ms. SNOWE. Mr. President, I rise today to introduce a bill that will 
offer small businesses greater flexibility in complying with their tax 
obligations. This legislation is one of a series of proposals that, 
once enacted, will reduce not only the amount of taxes that small 
businesses pay, but also will reduce the administrative burden that 
saddles small companies when trying to comply with the tax laws.
  The proposal that I am introducing today will permit start-up small 
business owners to use a taxable year other than the calendar year if 
they generally earn fewer than $5 million during the tax year.
  Before I talk about the specifics of this particular provision, let 
me first explain why it is so critical that we begin evaluating how we 
can reduce the administrative burden of the tax code. As is well-known 
small businesses are the backbone of our Nation's economy. According to 
the Small Business Administration, small businesses represent 99 
percent all employers, employ 51 percent of the private-sector 
workforce, and contribute 51 percent of the private sector output.
  Yet, despite the fact that small businesses are the real job-creators 
for our Nation's economy, the current tax system is placing an entirely 
unreasonable burden on them when trying to satisfy their tax 
obligations. The current tax code imposes a large, and expensive, 
burden on all taxpayers in terms of satisfying their reporting and 
recordkeeping obligations. The problem, though, is that small companies 
are disadvantaged most in terms of the money and time spent in 
satisfying their tax obligation.
  For example, according to the Small Business Administration's Office 
of Advocacy, small businesses spend an astounding 8 billion hours each 
year complying with government reports. They also spend more than 80 
percent of this time on completing tax forms. What's even more 
troubling is that companies that employ fewer than 20 employees spend 
nearly $1,304 per employee in tax compliance costs; an amount that is 
nearly 67 percent more than larger firms.
  These statistics are disturbing for several reasons. First, the fact 
that small businesses are being required to spend so much money on 
compliance costs means they have fewer earnings to reinvest into their 
business. This, in turn, means that they have less money to spend on 
new equipment or on worker training, which unfortunately has an adverse 
effect on their overall production and the economy as a whole.
  Second, the fact that small business owners are required to make such 
a sizeable investment of their time into completing paperwork means 
they have less time to spend on doing what they do best--namely running 
their business and creating jobs.
  Let me be clear that I am in no way suggesting that small business 
owners are unique in having to pay income taxes, and I'm certainly not 
expecting them to receive a free pass. What I'm asking for, though, is 
a change to make the tax code fairer and simpler so that small 
companies can satisfy this obligation without having to expend the 
amount of resources that they do currently.
  For that reason, the package of proposals that I have introduced will 
provide not only targeted, affordable tax relief to small business 
owners, but also simpler rules under the tax code. By simplifying the 
tax code, small

[[Page S2470]]

business owners will be able to satisfy their tax obligation in a 
cheaper, more efficient manner, allowing them to be able to devote more 
time and resources to their business.
  Specifically, the proposal that I am introducing today will permit 
more taxpayers to use the taxable year most suitable to their business 
cycle. Until 1986, businesses could elect the taxable year-end that 
made the most economic sense for the business. In 1986, Congress passed 
legislation requiring partnerships and S corporations, many of which 
are small businesses, to adopt a December 31 year-end. The tax code 
does provide alternatives to the calendar year for small businesses, 
but the compliance costs and administrative burdens associated with 
these alternatives prove to be too high for most small businesses to 
utilize.
  Meanwhile, C corporations, as large corporations often are, receive 
much more flexibility in their choice of taxable year. A C corporation 
can adopt either a calendar year or any fiscal year for tax purposes, 
as along as it keeps its books on that basis. This creates the unfair 
result of allowing larger businesses with greater resources greater 
flexibility in choosing a taxable year than smaller firms with fewer 
resources. This simply does not make sense to me. My bill changes these 
existing rules so that more small businesses will be able to use the 
taxable year that best suits their business.
  Importantly, these changes will not reduce the amount of taxes a 
small business pays by even one dollar. The overall amount of taxes a 
qualifying small business pays will remain the same. This bill simply 
permits more taxpayers to use a taxable year other than the calendar 
year and makes tax compliance easier.
  This bill is good policy and common sense. I look forward to working 
with the bill's cosponsor, Senator Lincoln, in providing small 
businesses with more flexibility in meeting their tax obligations.
  I ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 2462

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Small Business Tax 
     Flexibility Act of 2006''.

     SEC. 2. 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:

     ``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 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 (3) shall be includible in income 
     ratably over the 4 taxable years following the year of 
     termination, 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 
     or persons 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 December 31, 
     2005.
                                 ______