S Corporation Modernization Act of 2025

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.