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Last progress June 10, 2025 (8 months ago)
Introduced on June 10, 2025 by Timothy Patrick Sheehy
Rewrites major parts of the S-corporation tax rules and related deferred-compensation law. It lets beneficiaries who receive S‑corp stock at death take a deduction for the corporation’s built‑in gain (with special spreading and acceleration rules for depreciable/amortizable property); raises the threshold for ‘‘excessive’’ passive investment income and removes an automatic S‑status termination rule; permits nonresident aliens and IRAs (including Roth IRAs) to be S‑corp shareholders with new withholding and transfer rules; treats all employees (and estates) of a firm and its wholly owned businesses as a single shareholder for the S‑shareholder limit test; and repeals Internal Revenue Code §409A while adding a new definition for nonqualified deferred compensation and related conforming changes. The bill adds reporting and withholding duties, adjusts stock‑basis and transfer rules, phases and staggers effective dates (ranging from upon enactment for some death‑related rules to taxable years after 2024 and 2025 and a January 1, 2026 start for IRA changes), and makes numerous technical and conforming edits to the Internal Revenue Code. These changes affect S‑corporations, their owners and heirs, nonresident investors, retirement account holders, payroll/employee classifications, and providers and recipients of deferred compensation.
Adds a new section 1369 to Part II of subchapter S that allows a person holding S corporation stock whose basis is determined under section 1014(a) (a beneficiary or other person receiving stock at death) to take a deduction for the amortizable S corporation built-in gain amount. The amortizable portion is amortized over a 15-year period starting with the month that includes the applicable valuation date.
If an S corporation disposes of any amortizable S corporation built-in gain property, the deduction under subsection (a) for the shareholder’s taxable year that includes the corporation’s taxable year ending with the date of disposition cannot be less than the lesser of: (i) the shareholder’s pro rata share of the gain recognized on that disposition, or (ii) the amount determined under subsection (c)(1)(B) when only that property is taken into account. The section also states that overall deductions under subsection (a) may not exceed the amortizable S corporation built-in gain amount for the stock.
If the S corporation disposes of nonamortizable S corporation built-in gain property, the deduction under subsection (a) for the shareholder’s taxable year that includes the corporation’s taxable year ending with the date of disposition is increased by the lesser of: (i) the shareholder’s pro rata share of the gain recognized on that disposition, or (ii) the amount determined under subsection (c)(1)(B) when only that property is taken into account. That increase is limited so total such increases do not exceed the non-amortizable S corporation built-in gain amount for the stock.
Defines the “S corporation built-in gain amount” as the lesser of: (A) the excess (if any) of the basis of the stock determined under section 1014(a) over the adjusted basis of the stock immediately before the decedent’s death, or (B) the shareholder’s pro rata share (determined as of the applicable valuation date) of (i) the aggregate fair market value of all S corporation property that is amortizable or nonamortizable built-in gain property, over (ii) the aggregate adjusted basis of that property.
Defines “amortizable S corporation built-in gain property” as S corporation property that, as of the applicable valuation date, is of a character subject to depreciation or amortization; defines the “amortizable S corporation built-in gain amount” as the pro rata share of the S corporation built-in gain amount attributable to such amortizable property.
Read twice and referred to the Committee on Finance.
Who is affected and how:
S‑corporations and their shareholders: The bill directly alters who can be an S‑corp shareholder (adding nonresident aliens and IRAs) and changes the treatment of passive investment income. Many S‑corporations will see reduced risk of losing S status due to passive income and will need to change shareholder records and withholding practices.
Heirs, estates, trusts, and beneficiaries: People who receive S‑corp stock at death gain a new deduction for built‑in gain; estates and trustees must apply amortization rules, track basis adjustments, and comply with reporting requirements. This potentially reduces taxable gains recognized by heirs on inherited S‑corp interests but adds compliance complexity.
Nonresident investors and transferees: Nonresident alien shareholders will face clear tax withholding at the S‑corporation level for effectively connected income; buyers of S‑corp stock from foreign sellers may trigger transferee withholding, increasing transactional compliance.
Retirement account holders and custodians: Allowing IRAs (including Roth IRAs) to hold S‑corp stock creates new planning opportunities for retirement assets but requires custodians and IRA administrators to reconcile S‑corp restrictions, reporting, and any withholding rules for IRA-held shares after the effective date.
Employees and employers: Treating employees and their estates as a single shareholder for the shareholder‑limit test may affect corporate structuring and succession planning, particularly for closely held businesses with many employee owners or employee stock ownership arrangements.
Employers and deferred‑compensation participants: Repeal of §409A and the introduction of a new nonqualified deferred compensation definition will affect design, taxation, reporting, and timing of executive and other deferred‑compensation arrangements; employers, plan administrators, and executives will need to review existing plans and reporting systems.
Tax professionals and the IRS: The changes increase complexity across basis, transfer, withholding, and reporting rules, placing a greater compliance and administrative burden on preparers, payroll/payor agents, custodians, and the IRS. Revenue effects depend on behavioral responses: broadened S‑status access and higher passive thresholds may reduce tax collections in some areas, while repeal of §409A could shift timing of tax recognition.
Potential economic effects: The bill may encourage more businesses to elect or retain S‑corporation status, permit new classes of investors (nonresidents, IRAs), and influence estate planning strategies. The deferred‑compensation changes could alter executive pay design and liquidity timing.