Sponsor
Timothy Patrick Sheehy
Senator · R-MT
Senator · R-MT
The bill expands and clarifies S-corporation ownership and tax rules—helping small businesses, heirs, and some investors—at the cost of reduced federal revenue, greater compliance burdens, potential cash‑flow harms for certain transfers, and distributional effects favoring wealthier owners.
Taxpayers, tax preparers, and the IRS benefit from clearer, harmonized statutory language and cross-references (including defaulting to Internal Revenue Code references and consolidating deferred-comp rules), reducing ambiguity and improving tax administration and compliance clarity.
Heirs, estates, and transferees of S-corporation owners can reduce taxable income over time because certain built-in gains can be amortized over 15 years and suspended losses can be realized on death, easing estate tax and succession transitions.
Small businesses and potential investors gain broader ownership and capital options because nonresident aliens can invest in S corporations, IRAs (including Roth IRAs) can hold S-corp stock, and many employee-shareholders can be treated in aggregate to preserve S status.
Taxpayers in general could face higher federal deficits or shifted tax burdens because several changes (amortization allowances, expanded S status retention, and other deductions) are likely to reduce future federal tax revenue.
Small businesses, employers, IRA custodians, and tax professionals will face increased compliance complexity and administrative costs from new elections, valuation rules, withholding and reporting duties, special-case definitions, and transition requirements.
Nonresident shareholders, heirs, and buyers of S-corp stock may face immediate cash‑flow burdens and transactional friction because of deemed-sale withholding rules and a 10% withholding on certain transfers, potentially chilling investment or secondary-market activity.
Based on analysis of 8 sections of legislative text.
Modernizes S‑corporation rules: creates a 15‑year amortizable built‑in‑gain deduction for inherited S stock, raises passive income limits, allows nonresident and IRA shareholders, and overhauls deferred‑compensation 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
Creates a broad set of tax-law changes to modernize S corporation rules, expand who may be S shareholders, change passive-income limits, add a new post‑death deduction for built‑in gains, clarify transfer and suspended-loss rules at death, allow IRAs (including Roth IRAs) to hold S stock, and overhaul deferred‑compensation rules by repealing section 409A and replacing aspects of section 457A. Most changes alter Internal Revenue Code rules for taxable years beginning after December 31, 2024, with some provisions phased later (including an IRA change effective January 1, 2026 and deferred‑compensation changes effective for taxable years after December 31, 2025). The measure affects S corporations, their shareholders (including nonresident aliens and employee groups), estates and beneficiaries, retirement accounts, banks and depository holding companies, and employers with nonqualified deferred compensation arrangements. It creates a 15‑year amortizable deduction for built‑in gains on stepped‑up S stock, raises the passive investment income safe harbor and removes an automatic S‑status termination for excess passive income, and imposes new withholding and reporting duties when nonresident aliens hold S stock.