WASHINGTON, D.C. – This week, U.S. Rep. Mike Carey (R-Ohio-15) introduced the S Corporation Modernization Act, legislation to modernize outdated tax rules affecting S corporations, helping businesses access capital, expand employee ownership, and compete in today’s economy.
“S corporations are the backbone of our economy, supporting tens of millions of jobs and driving economic growth in communities across the country,” said Rep. Carey. “Unfortunately, many of the rules governing S corporations haven’t kept pace with today’s economy and create unnecessary hurdles for S corporations, both large and small. The S Corporation Modernization Act updates these outdated policies, reduces complexity, and gives job creators the flexibility they need to invest, grow, and keep more Americans employed.”
The S Corporation Modernization Act includes several updates to the tax code, including:
- Allowing S corporations to elect an inside basis adjustment following the death of a shareholder, similar to partnerships.
- Modernizing passive investment income rules by raising the threshold for the so-called “Sting Tax” and repealing the automatic loss of S corporation status after three years.
- Expanding employee ownership opportunities by treating employee owners similarly to ESOPs for shareholder limitation purposes.
- Allowing IRAs to own S corporation stock under rules comparable to other qualified retirement plans.
- Preserving suspended losses when S corporation shares transfer upon a shareholder’s death.
- Repealing Section 409A to reduce unnecessary complexity surrounding deferred compensation.
- Increasing the shareholder limit for S corporations from 100 to 250 to better reflect today’s business environment.
S corporations are one of the most common business structures in the United States, providing pass-through taxation while allowing businesses to raise capital, create jobs, and reinvest in their operations. The legislation builds on decades of bipartisan reforms by updating provisions that have become outdated or unnecessarily burdensome for today’s small businesses.
Full text of the bill can be found here.
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