The S Corporation Modernization Act of 2025 makes sweeping changes to tax rules for S corporations, which are commonly used by family and small businesses. The bill allows heirs who inherit S corporation stock to deduct built-in gains over 15 years, relaxes restrictions on passive income by raising the threshold from 25% to 60%, permits nonresident aliens and retirement accounts to own S corporation stock, and expands shareholder flexibility by allowing employees to count as a single shareholder. The legislation also clarifies what counts as passive income, imposes a 10% withholding tax on nonresident alien gains, and streamlines deferred compensation rules. Most provisions take effect after December 31, 2024, with some deferred to 2025 and 2026, and the changes are designed to modernize outdated S corporation rules while providing tax relief for family-owned businesses and inherited interests.
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