The S Corporation Modernization Act of 2026 makes several significant changes to tax rules for small businesses organized as S corporations. The bill expands eligibility for S corporation ownership by allowing nonresident aliens and individual retirement accounts (IRAs) to hold shares, and increases the maximum number of shareholders from 100 to 250. It also raises the passive investment income threshold from 25 percent to 60 percent and eliminates the automatic termination of S corporation status when a company exceeds the old income limit. For inherited S corporation stock, the bill creates a new deduction allowing heirs to amortize built-in gains over 15 years and permits suspended losses to be transferred when the original owner dies. Additionally, the legislation repeals Section 409A, which governs the taxation of nonqualified deferred compensation plans, and counts all employees of a firm as a single shareholder toward the shareholder limit. Most provisions take effect for tax years beginning after December 31, 2025 or 2026, except rules affecting nonresident aliens which apply to sales and dispositions after December 31, 2025.
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