To amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes.
Analysis under review: This bill has generated analysis that may be too generic or incomplete. Clause-level evidence remains available below.
Summary
The S Corporation Modernization Act of 2025 makes several reforms to how S corporations are taxed. It creates a new deduction (Section 1369) allowing heirs of deceased S corporation shareholders to amortize built-in gains over 15 years instead of recognizing them immediately, reducing the tax burden on family business succession. The passive investment income threshold is raised from 25% to 60%, and excessive passive income no longer triggers automatic termination of S corporation status. S corporations are allowed to temporarily convert to C corporation status to facilitate ESOP distributions without triggering double taxation. The maximum number of S corporation shareholders is increased from 100 to 500. Electing Small Business Trusts gain the ability to claim charitable deductions. Section 409A (nonqualified deferred compensation rules) is repealed entirely, eliminating the 20% penalty tax and strict timing rules that currently apply to deferred compensation arrangements.
Evidence Chain:
This summary is generated from the full bill text using AI analysis. Expand "Detailed Analysis" below for identified beneficiaries/burden bearers.
At a Glance
What This Bill Does
Modernizes the tax treatment of S corporations by addressing the built-in gains tax upon shareholder death, expanding passive income thresholds, allowing S-to-C corporation conversions for ESOP purposes, expanding eligible shareholder types, modifying charitable contribution rules, and repealing Section 409A deferred compensation rules.
Who Benefits
- S corporation shareholders
- Family-owned businesses
- S corporation heirs and estates
Who Bears Costs
- US Treasury (reduced tax revenue)
- IRS (administrative complexity of new rules)
Key Policy Areas
{'domain': 'Finance', 'evidence': 'All provisions amend the Internal Revenue Code affecting S corporation taxation and shareholder treatment'}, {'domain': 'Labor', 'evidence': 'Sec 5 allows S-to-C conversion for ESOP distribution; Sec 8 repeals 409A deferred compensation rules'}
Primary Purpose
Modernizes the tax treatment of S corporations by addressing the built-in gains tax upon shareholder death, expanding passive income thresholds, allowing S-to-C corporation conversions for ESOP purposes, expanding eligible shareholder types, modifying charitable contribution rules, and repealing Section 409A deferred compensation rules.
Policy Domains
Legislative Strategy
"Comprehensive modernization removing barriers to S corporation formation and succession, making S corp status more attractive vs. C corp for family and closely-held businesses"
Sponsors
Legislative Progress
IntroducedMr. Sheehy introduced the following bill; which was read twice …
Stakeholder Effects
cui bono?How this legislation distributes effects. Mention counts reflect frequency, not effect magnitude.
Employee-owned S corporations, Employers offering nonqualified deferred compensation, Family-owned S corporations
Positive-direction: Employee-owned S corporations, Employers offering nonqualified deferred compensation, Family-owned S corporations, Growing S corporations approaching 100-shareholder limit, S corporations at risk of involuntary termination, S corporations seeking foreign investors, S corporations with significant investment income
Negative-direction: S corporations with nonresident alien shareholders
Electing Small Business Trusts, Executives and employees with deferred compensation plans, Nonresident alien S corp shareholders
Positive-direction: Electing Small Business Trusts, Executives and employees with deferred compensation plans, Nonresident alien investors, S corporation shareholder heirs and estates, S corporation shareholders inheriting stock
Negative-direction: Nonresident alien S corp shareholders
IRS, US Treasury
Positive-direction: IRS
Negative-direction: US Treasury
Tax advisory firms, Tax compliance firms
Positive-direction: Tax advisory firms
Negative-direction: Tax compliance firms
Bill Structure & Actor Mappings
Who is "The Secretary" in each section?
Key Definitions
Terms defined in this bill
S corporation property that is of a character subject to depreciation or amortization as of the applicable valuation date
An S corporation that elects the application of the built-in gain deduction with respect to a shareholder, as prescribed by the Secretary
We use a combination of our own taxonomy and classification in addition to large language models to assess meaning and potential beneficiaries. High confidence means strong textual evidence. Always verify with the original bill text.
Learn more about our methodology