Sponsor
Timothy Patrick Sheehy
Senator · R-MT
Senator · R-MT
The bill expands and clarifies S‑corporation eligibility, transfer, and reporting rules to ease tax exposure and broaden investment/retirement options for many small businesses and owners, but it also raises compliance burdens, creates new withholding and cash‑flow risks, and reduces some federal tax revenue—shifting complexity and costs onto taxpayers, heirs, and administrators.
Many small S‑corporation owners: the bill raises and clarifies the passive‑income threshold and narrows what counts as passive income, making it less likely their firms will trigger the section 1375 corporate‑level tax and reducing unexpected tax liabilities.
Employee‑owned businesses with many employee‑shareholders: the bill lets employers count many employees as a single shareholder for S‑status purposes, helping firms keep pass‑through tax treatment and avoid losing S status.
Taxpayers and the IRS/tax preparers generally: the bill updates statutory references, harmonizes cross‑references and headings, and consolidates deferred compensation rules (repealing §409A and folding rules into §457A), reducing some legal uncertainty and streamlining how the Code is read and applied.
Nearly all S‑corporations, their owners, and tax preparers: the bill adds numerous new elections, valuation rules, withholding obligations, special exclusions, and definitional changes that substantially increase compliance, reporting, and administrative burdens.
All taxpayers: by expanding who can retain S status, allowing amortizable deductions, and narrowing triggers for section 1375, the bill reduces federal corporate/income tax revenues, potentially increasing deficits or pressure on other taxes or public services.
Nonresident shareholders, buyers/transferees of S‑corp stock, and small businesses: new withholding rules (including a 10% transferee withholding and deemed‑sale computations) can create immediate cash‑flow burdens and risks of over‑withholding relative to actual tax owed, complicating stock transactions.
Based on analysis of 8 sections of legislative text.
Rewrites S‑corporation ownership and tax rules: adds a 15‑year built‑in gain amortization on inherited S‑stock, raises passive income limit, allows nonresident and IRA shareholders, adjusts death‑loss transfers, and replaces 409A with revised 457A rules.
Official title: Amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes.
Introduced June 10, 2025 by Timothy Patrick Sheehy · Last progress June 10, 2025
Makes multiple changes to S‑corporation and related tax rules: creates a 15‑year amortizable built‑in gain deduction for stepped‑up S‑corp stock on death, raises the passive investment income threshold and removes automatic S‑status termination for excessive passive income, allows new types of shareholders (nonresident aliens, IRAs including Roths, and aggregated employee groups), adds rules for transfer of suspended S‑corp losses at death, and repeals section 409A while replacing it with revised 457A deferred‑compensation rules. Effective dates are staggered for different provisions.