This bill modernizes S corporation tax rules in several significant ways. It allows nonresident aliens to become S corporation shareholders for the first time, subject to withholding taxes on their share of effectively connected income and gains. The legislation increases the passive investment income threshold from 25 percent to 60 percent and eliminates excessive passive income as a reason to terminate S corporation status, making the business structure more flexible for companies with investment income. The bill also permits Individual Retirement Accounts (IRAs) to hold S corporation stock, expands S corporation eligibility by allowing a company's employees to be counted as a single shareholder rather than individual shareholders, and allows suspended losses to transfer to heirs upon a shareholder's death. Additionally, the legislation creates a new deduction for heirs who inherit S corporation stock with built-in gains, amortized over 15 years. Most provisions take effect for taxable years beginning after December 31, 2023, though some changes apply to transactions and deaths occurring after the bill's enactment.
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