S.2017 - S Corporation Modernization Act of 2025 (119th Congress)
Summary
The S Corporation Modernization Act of 2025 (S.2017) proposes several amendments to the Internal Revenue Code of 1986, specifically targeting S corporations. Key provisions include changes to the treatment of built-in gains upon the death of a shareholder, modifications to passive investment income rules, and allowing nonresident aliens and IRAs to be S corporation shareholders. The bill also addresses the treatment of employees as shareholders and the transfer of suspended losses incident to death, and repeals the inclusion in gross income of deferred compensation under nonqualified deferred compensation plans.
Expected Effects
If enacted, this act would significantly alter the operational landscape for S corporations. These changes aim to reduce restrictions, simplify tax treatments, and broaden the scope of eligible shareholders. Ultimately, the goal is to make S corporations a more attractive business structure.
Potential Benefits
- Tax Relief for Heirs: Allows deductions for built-in gains upon the death of a shareholder, potentially reducing the tax burden on inherited S corporation stock.
- Increased Flexibility for S Corporations: Modifies passive investment income rules, allowing S corporations to have a higher percentage of passive income without penalty.
- Expanded Pool of Investors: Permits nonresident aliens and IRAs to become S corporation shareholders, potentially increasing investment and capital availability.
- Simplified Shareholder Count: Treats employees of a firm as a single shareholder, easing administrative burdens for S corporations with many employee shareholders.
- Loss Transfer: Allows for the transfer of suspended losses incident to death.
Most Benefited Areas:
Potential Disadvantages
- Complexity: The new rules regarding built-in gains and nonresident alien shareholders could introduce additional complexity into tax compliance for S corporations.
- Potential for Abuse: Allowing IRAs as shareholders could create opportunities for tax avoidance if not carefully regulated.
- Revenue Impact: Repealing the inclusion of deferred compensation under nonqualified plans could reduce government tax revenue.
- Increased Scrutiny: The changes might lead to increased IRS scrutiny of S corporations to ensure compliance with the new regulations.
- Unintended Consequences: As with any major tax law change, there is a risk of unintended economic consequences that may not be immediately apparent.
Constitutional Alignment
The bill primarily deals with tax law, which falls under the purview of Congress's power to lay and collect taxes as outlined in Article I, Section 8 of the Constitution. The provisions regarding nonresident aliens could also be seen as related to Congress's power to regulate commerce with foreign nations. The bill does not appear to infringe upon any specific constitutional rights or protections.
Impact Assessment: Things You Care About ⓘ
This action has been evaluated across 19 key areas that matter to you. Scores range from 1 (highly disadvantageous) to 5 (highly beneficial).