Sponsor
Mike Carey
Representative · R-OH
Representative · R-OH
The bill makes it easier for more businesses, heirs, foreign investors, and retirement accounts to hold or retain S‑corporation status—benefiting small businesses and some investors—at the cost of substantially greater compliance complexity, potential revenue loss, new tax‑timing risks for taxpayers, and increased enforcement challenges for the IRS.
Small-business owners and S‑corporation shareholders: the bill widens and clarifies S‑corp eligibility (raises the passive‑income threshold, treats employee‑owned interests as a single shareholder, and phases changes in for 2027), helping more closely held businesses keep or elect S status and avoid C‑corporation conversion and double taxation.
Heirs, beneficiaries, and estates receiving S‑corp stock at death: beneficiaries can amortize built‑in gain over 15 years and get clearer rules for suspended losses on post‑death transfers, producing more predictable annual tax treatment for inherited S‑corp interests.
Nonresident‑alien individuals and foreign investors: nonresident aliens may own S‑corp shares under a defined withholding framework and receive a withholding credit, expanding cross‑border investment opportunities while reducing double‑tax risk when they file U.S. returns.
S corporations, estates, IRA trustees, employers, and the IRS: the bill creates widespread new reporting, withholding, basis‑adjustment, valuation, and recordkeeping requirements and transitional complexity, substantially increasing compliance and administrative costs for businesses, fiduciaries, taxpayers, and tax authorities.
Federal budget and taxpayers: by preserving S‑status for more entities, permitting IRA ownership of S stock, and allowing amortization of built‑in gains, the bill may reduce taxable bases and lower federal revenues or shift tax burdens to other taxpayers.
Heirs, decedents' estates, and workers with deferred pay: taxpayers may face adverse timing or recapture risks—amortization can lead to ordinary‑income recapture later, death‑related rule changes can limit loss deductions, and repeal/reworking of 409A can accelerate taxable income or introduce uncertainty about deferred compensation timing.
Based on analysis of 9 sections of legislative text.
Rewrites S‑corporation eligibility and tax rules: amortizable built‑in gain deduction for inherited S stock, higher passive‑income threshold, nonresident and IRA shareholders allowed, repeal of §409A, and new withholding/reporting.
Official title: To amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes.
Introduced July 22, 2026 by Mike Carey · Last progress July 22, 2026
Updates S corporation tax rules to expand who can be an S shareholder, change passive-income tests, create a new amortizable built-in gain deduction for certain inherited S stock, allow IRAs to hold S stock trusts, treat employees as a single shareholder unit for counting purposes, repeal the nonqualified deferred compensation rules in section 409A, and adjust related withholding and basis rules. Many provisions take effect for taxable years beginning after December 31, 2025, 2026, or 2027 depending on the change. The bill makes substantive changes to the Internal Revenue Code: it creates a 15-year amortizable deduction for certain built-in gains on inherited S corporation stock, raises the passive investment income safe-harbor from 25% to 60% (and stops automatic S-status termination for exceeding that threshold), permits nonresident aliens and certain IRAs to be S shareholders with new withholding on effectively connected income, consolidates employee ownership counting rules, and repeals section 409A (affecting deferred compensation rules). These changes alter tax treatment, reporting, withholding, and eligibility rules affecting S corporations, their shareholders, employees, and retirement accounts.