“A bill to amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes.”
No CRS summary available for this bill.
This section cites the Act as the "S Corporation Modernization Act of 2025" and provides that, except as otherwise expressly provided, amendments made by the Act are to the Internal Revenue Code of 1986.
This section establishes IRC §1369, allowing a deduction to heirs of electing S corporation shareholders (i.e., those with stock basis stepped up to fair market value under IRC §1014(a) upon the decedent's death) for the amortizable S corporation built-in gain amount (i.e., pro rata share of net unrealized appreciation in depreciable/amortizable assets), amortized ratably over 15 years beginning in the month of the applicable valuation date. Upon disposition of amortizable built-in gain property, the deduction accelerates to the lesser of the shareholder's pro rata share of recognized gain or remaining amount allocable to that property (subject to overall limits); dispositions of nonamortizable built-in gain property (i.e., nondepreciable assets, excluding certain partnership equity) similarly increase the deduction. The provision includes definitions (e.g., overall built-in gain amount as lesser of stock step-up or pro rata net unrealized appreciation in qualifying assets), special rules treating S corporation distributive shares of electing S corporation partnership property consistently, and an election mechanism for S corporations.
This section increases from 25% to 60% the threshold of passive investment income (i.e., generally gross receipts from rents, royalties, dividends, interest, and annuities) as a percentage of total gross receipts that triggers a corporate-level tax on excess net passive income for S corporations with accumulated earnings and profits from C corporation years (IRC §1375); repeals the prior-law termination of an S corporation's election if passive investment income exceeded 25% for three consecutive taxable years (IRC §1362(d)(3)); and revises the definition of passive investment income to exclude (1) interest on notes from inventory sales, (2) income from active lending or finance businesses, (3) certain dividends from qualifying C corporations, (4) for banks (as defined in IRC §581) and depository institution holding companies (as defined in 12 U.S.C. §1813(w)(1)), interest income and dividends on required assets (e.g., Federal Reserve Bank stock), and (5) gains (but not losses or return of basis) from sales of capital assets, stock, or securities. (Thus, these changes enable S corporations—pass-through entities elected under subchapter S that are subject to eligibility restrictions—to hold more passive income sources without tax or loss of status, particularly benefiting financial institutions.) The amendments apply to taxable years beginning after December 31, 2024.
This section permits nonresident alien individuals to be S corporation shareholders, which was previously prohibited under IRC §1361(b)(1)(C). It treats a nonresident alien's gain or loss on the sale or exchange of S corporation stock as effectively connected with a U.S. trade or business to the extent of the shareholder's pro rata share of gain or loss from a deemed sale of the corporation's assets at fair market value. The section also requires S corporations with effectively connected taxable income to withhold tax at the highest individual income tax rate under IRC §1 on nonresident alien shareholders' pro rata shares of such income (with credits allowed to shareholders), imposes 10% withholding by transferees on amounts realized from dispositions of S corporation stock where gain would be so treated, and makes conforming amendments.
This section establishes a rule under IRC §1361(c)(7) treating all employees (as defined under IRC §3121(d)(1) or (2)), their estates, and any wholly owned business entities (as determined by the Secretary) of an S corporation as a single shareholder for purposes of the 100-shareholder limit on S corporation eligibility. The change applies to taxable years beginning after December 31, 2024. (Thus, S corporations may have numerous employee shareholders without those individuals counting separately against the limit.)
This section expands the eligible shareholders for S corporations to include trusts constituting individual retirement accounts (IRAs) under IRC §408(a), including Roth IRAs under §408A (previously ineligible), effective January 1, 2026. The section also modifies the exemptions from prohibited transaction rules under IRC §4975(d)(16) to apply to sales of S corporation stock held in such IRAs.
This section expands the transfers to which suspended S corporation losses (i.e., losses disallowed under IRC §1366(d) due to insufficient basis) carry over from only transfers incident to divorce under IRC §1041(a) to also include transfers incident to the death of the shareholder. Effective for deaths after the date of enactment.
This section repeals IRC §409A, which requires inclusion in gross income (plus a 20% penalty and interest) of deferred compensation from nonqualified deferred compensation plans (i.e., employer plans deferring compensation for executives and highly compensated employees beyond tax-favored qualified plans) that fail to satisfy strict timing rules for deferral elections and distributions. It makes conforming amendments to multiple IRC sections, including (1) updating references to §409A, (2) striking reporting requirements under §§3401, 6041, and 6051, and (3) amending §457A—which taxes certain deferred compensation from service providers to nonqualified entities (e.g., certain foreign corporations and tax-exempt organizations)—to define "nonqualified deferred compensation plan," revise short-term deferral exceptions, and exclude qualified stock deferrals under §83(i); and the changes apply to taxable years beginning after December 31, 2025.