Sponsor
Mike Carey
Representative · R-OH
Representative · R-OH
The bill expands who can own and qualify as S corporations and clarifies many rules—helping small businesses, heirs, foreign and retirement investors—but it shifts tax revenue, raises administrative and compliance burdens, and creates new avenues for aggressive planning that may complicate enforcement.
Small-business owners, employees, nonresident aliens, and retirement accounts can more easily qualify for or retain S‑corporation status (higher passive‑income threshold, relaxed shareholder‑count rules, permission for nonresident and IRA-held shares), preserving pass‑through taxation and widening access to capital.
Heirs and beneficiaries inheriting S‑corporation stock get a 15‑year amortization of built‑in gain and clearer rules for suspended losses at death, which smooths taxable income and eases estate tax timing for family‑owned businesses.
Several provisions clarify ambiguous rules (passive‑income exceptions, withholding for nonresident shareholders, IRA prohibited‑transaction treatment, and 457A/deferral definitions), reducing administrative disputes and improving predictability for taxpayers and the IRS.
Businesses, trustees, heirs, and taxpayers will face substantially higher compliance, reporting, and recordkeeping burdens (new basis adjustments, withholding, valuation, and transitional filings) across many provisions, increasing administrative costs.
Federal revenue may decline or deficits rise as more entities retain pass‑through S status and tax‑advantaged accounts can hold private business equity, shifting the tax burden or reducing collections.
Broader exceptions and relaxed ownership rules (passive‑income exceptions, IRA/nonresident ownership, repeal of 409A) open opportunities for aggressive tax planning or abuse, weakening protections and complicating enforcement.
Based on analysis of 9 sections of legislative text.
Modernizes S‑corporation rules: new amortizable built‑in gain deduction, higher passive‑income threshold, new shareholder classes and withholding, and repeal of section 409A.
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
Allows new tax deductions and shareholder rules for S corporations, expands who can be S shareholders (including nonresident aliens and certain IRAs), raises the passive‑income threshold, and repeals the tax rules governing nonqualified deferred compensation (section 409A). It also creates withholding and reporting requirements for nonresident‑alien shareholders and changes the way certain built‑in gains inherited from decedents are amortized and deducted. The bill alters many S‑corporation rules affecting basis adjustments, distributions, shareholder counts (including employee aggregation), and transfers at death, with staggered effective dates (mostly for tax years beginning after Dec 31, 2025, and some changes effective in 2027).