119 S2017 IS: S Corporation Modernization Act of 2025
U.S. Senate
2025-06-10
text/xml
EN
Pursuant to Title 17 Section 105 of the United States Code, this file is not subject to copyright protection and is in the public domain.
1.
(a)
This Act may be cited as the S Corporation Modernization Act of 2025
.
(b)
Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.
2.
Treatment of S corporation built-in gain amount upon death of
shareholder
(a)
Part II of subchapter S of chapter 1 is amended by adding at the end the following:
1369.
Treatment of S corporation built-in gain amount upon death of
shareholder
(a)
A person holding stock in an electing S corporation the basis of which is determined under section 1014(a) (hereafter in this section referred to as the shareholder
) shall be allowed a deduction with respect to the amortizable S corporation built-in gain amount. Except as provided under subsection (b), the amount of such deduction for any taxable year shall be determined by amortizing the amortizable S corporation built-in gain amount over the 15-year period beginning with the month which includes the applicable valuation date.
(b)
Deduction in case of disposition of S corporation
property
(1)
Accelerated deduction in case of disposition of amortizable
S corporation built-in gain property
(A)
If there is a disposition of any amortizable S corporation built-in gain property, then the deduction allowed under subsection (a) with respect to any stock (determined without regard to paragraph (2)) for the taxable year of the shareholder in which or with which the taxable year of the S corporation which includes the date of such disposition ends, shall (except as otherwise provided in this section) not be less than the lesser of—
(i)
the pro rata share of the gain recognized on such disposition, or
(ii)
the amount determined under subsection (c)(1)(B) by only taking into account such property.
(B)
Overall allowance not increased
Except as provided in paragraph (2), no deduction shall be allowed under subsection (a) with respect to any stock for any taxable year to the extent that such deduction (when added to the deductions attributable to amortizable S corporation built-in gain property so allowed for all prior taxable years) exceeds the amortizable S corporation built-in gain amount with respect to such stock.
(2)
Additional deduction in case of disposition of
nonamortizable S corporation built-in gain property
(A)
If there is a disposition of any nonamortizable S corporation built-in gain property, then the amount allowable as deduction under subsection (a) with respect to any stock for the taxable year of the shareholder in which or with which the taxable year of the S corporation which includes the date of disposition ends, shall be increased by the lesser of—
(i)
the pro-rata share of the gain recognized on such disposition, or
(ii)
the amount determined under subsection (c)(1)(B) by only taking into account such property.
(B)
Subparagraph (A) shall not apply with respect to any stock for any taxable year to the extent that such increase (when added to the increased deductions so allowed under subparagraph (A) for all prior taxable years) exceeds the non-amortizable S corporation built-in gain amount with respect to such stock.
(c)
Definitions and special rules
For purposes of this section— (1) S corporation built-in gain amount The term S corporation built-in gain amount
means the lesser of—
(A)
the excess (if any) of— (i) the basis of the stock referred to in subsection (a) as determined under section 1014(a), over
(ii)
the adjusted basis of such stock immediately before the death of the decedent, or
(B)
the pro rata share (determined as of the applicable valuation date) of—
(i)
the aggregate fair market value of all property held by the S corporation which is amortizable S corporation built-in gain property or nonamortizable S corporation built-in gain property, over
(ii)
the aggregate adjusted basis of all such property held by the S corporation as of such date.
(2)
Amortizable S corporation built-in gain property
The term amortizable S corporation built-in gain property
means, as of the applicable valuation date, the S corporation property that is of a character subject to depreciation or amortization.
(3)
Amortizable S corporation built-in gain amount
The term amortizable S corporation built-in gain amount
means the pro rata share of the portion of the S corporation built-in gain amount that is attributable to amortizable S corporation built-in gain property.
(4)
Non-amortizable S corporation built-in gain
property
The term non-amortizable S corporation built-in gain property
means, as of the applicable valuation date, the S corporation property that is not of a character subject to depreciation or amortization (other than an equity interest in an electing S corporation partnership).
(5)
Non-amortizable S corporation built-in gain amount
The term non-amortizable S corporation built-in gain amount
means the pro rata share of the portion of the S corporation built-in gain amount that is attributable to non-amortizable S corporation built-in gain property.
(6)
Special rule for partnership interests
If an electing S corporation owns, directly or indirectly, an equity interest in an electing S corporation partnership, including a lower-tier electing S corporation partnership, the amortizable S corporation built-in gain property and the non-amortizable S corporation built-in gain property shall include the electing S corporation’s distributive share of such property held by the partnership. Rules similar to the rules under paragraphs (1), (2), (3), (4), and (5) of this subsection shall apply to determine the electing S corporation’s distributive share of the amortizable S corporation built-in gain property and the non-amortizable S corporation built-in gain property held by such partnership for purposes of this section. For purposes of subsection (b), a disposition of an interest in an electing S corporation partnership shall be treated as a disposition of the electing S corporation’s distributive share of the property held by such partnership.
(7)
The term electing S corporation
means, with respect to any shareholder, any S corporation which elects the application of this section with respect to such shareholder at such time and in such form and manner as the Secretary may prescribe.
(8)
Electing S corporation partnership
The term electing S corporation partnership
means, with respect to any shareholder, any equity interest in a partnership owned directly or indirectly by the electing S corporation, including a lower-tier partnership, for which the S corporation elects the application of this section with respect to such shareholder at such time and in such form and manner as the Secretary may prescribe.
(9)
Applicable valuation date
The term applicable valuation date
means—
(A)
in the case of a decedent with respect to which the executor of the decedent’s estate elects the application of section 2032, the date months after the decedent’s death, and
(B)
in the case of any other decedent, the date of the decedent’s death.
(d)
Recharacterization of gains as ordinary income to extent of
deduction
If— (1) stock of an S corporation with respect to which a deduction was allowed under this section,
(2)
amortizable S corporation built-in gain property with respect to which a deduction was allowed under subsection (b)(1), or
(3)
nonamortizable S corporation built-in gain property with respect to which a deduction was allowed under subsection (b)(2),
is disposed of
at a gain (determined without regard to whether or not such gain is
recognized and reduced by any amount of gain which is treated as
ordinary income under any other provision of this subtitle), the
amount of such gain (or the shareholder’s pro rata share of such
gain in the case of property described in paragraph (2) or (3))
shall be treated as gain which is ordinary income (and shall be
recognized notwithstanding any other provision of this subtitle) to
the extent of the excess of the aggregate deductions allowable under
this section with respect to such stock for the taxable year of such
disposition and all prior taxable years over the amounts taken into
account under this subsection for all prior taxable
years.
(e)
No deduction shall be allowed under subsection (a) with respect to any stock in an electing S corporation with respect to any period beginning after the earlier of—
(1)
the date on which the corporation’s election under section 1362 terminates, or
(2)
the date on which the shareholder transfers such stock to any other person.
(f)
Treatment of certain transfers
(1)
Distributions from estates or trusts
Notwithstanding any other provision of this section, in the case of a distribution of stock from an estate or trust to a beneficiary, the beneficiary (and not the estate or trust) shall be treated as the shareholder to which this section applies with respect to periods after such distribution.
(2)
Certain transfers involving spouses
Notwithstanding any other provision of this section, in the case of a transfer described in section, the transferee (and not the transferor) shall be treated as the shareholder to which this section applies with respect to periods after such transfer.
(3)
Notwithstanding any other provision of this section, in the case of a gift, the donee (and not the donor) shall be treated as the shareholder to which this section applies with respect to periods after such gift.
(4)
Notwithstanding any other provision of this section, in the case of a transfer to a trust, the trust (and not the transferor) shall be treated as the shareholder to which this section applies with respect to periods after such transfer.
(g)
Treatment of income in respect of the decedent
(1)
Adjustment to built-in gain of property held by s
corporation
For purposes of subsection (c)(1)(B), the fair market value of any property taken into account under subparagraph (B)(i) thereof shall be decreased by any amount of income in respect of the decedent with respect to such property to which section 691 applies. For purposes of subsections (b)(1)(A) and (b)(2)(A), the gain recognized on the disposition of such property shall be reduced by such amount.
(2)
Adjustment to basis of s corporation stock
For adjustment to basis of S corporation stock, see section 1367(b)(4)(B).
(h)
Except as otherwise provided by the Secretary, for purposes of section 6037, the amounts determined under subsections (b)(1), (b)(2), (c)(1)(B), (c)(3), (c)(5), (c)(6), (d)(2), and (d)(3) shall be treated as items of the corporation and the pro rata share determined under such subsection shall be furnished to the shareholder under section 6037(b).
.
(b)
Adjustment to basis of stock
(1)
Section 1367(a)(2) is amended by striking and
at the end of subparagraph (D), by striking the period at the end of subparagraph (E) and inserting , and
, and by inserting after subparagraph (E) the following new subparagraph:
(F)
the amount of the shareholder’s deduction under section 1369.
.
(2)
Adjustment not taken into account in determining treatment of
distributions
Section 1368 is amended— (A) in subsection (d)(1), by inserting (other than subsection (a)(2)(F) thereof)
after section 1367
, and
(B)
in subsection (e)(1)(A)— (i) by striking this title and the phrase
and inserting this title, the phrase
, and
(ii)
by inserting , and no adjustment shall be made under section 1367(a)(2)(F)
after section 1367(a)(2)
.
(c)
The table of sections for part II of subchapter S of chapter 1 is amended by adding at the end the following new item:
Sec. 1369. Treatment of S corporation built-in
gain amount upon death of shareholder.
.
(d)
The amendments made by this section shall apply with respect to decedents dying after the date of the enactment of this Act, in taxable years ending after such date.
3.
Modifications to S corporation passive investment income rules
(a)
Increased percentage limit
Section 1375(a)(2) is amended by striking 25 percent
and inserting 60 percent
.
(b)
Repeal of excessive passive income as a termination event
Section 1362(d) is amended by striking paragraph (3).
(c)
(1)
Section 1375(b) is amended by striking paragraphs (3) and (4) and inserting the following new paragraph:
(3)
Passive investment income defined
(A)
Except as otherwise provided in this paragraph, the term passive investment income
means gross receipts derived from royalties, rents, dividends, interest, and annuities.
(B)
Exception for interest on notes from sales of
inventory
The term passive investment income
shall not include interest on any obligation acquired in the ordinary course of the corporation’s trade or business from its sale of property described in section 1221(a)(1).
(C)
Treatment of certain lending or finance companies
If the S corporation meets the requirements of section 542(c)(6) for the taxable year, the term passive investment income
shall not include gross receipts for the taxable year which are derived directly from the active and regular conduct of a lending or finance business (as defined in section 542(d)(1)).
(D)
Treatment of certain dividends
If an S corporation holds stock in a C corporation meeting the requirements of section 1504(a)(2), the term passive investment income
shall not include dividends from such C corporation to the extent such dividends are attributable to the earnings and profits of such C corporation derived from the active conduct of a trade or business.
(E)
In the case of a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1))), the term passive investment income
shall not include—
(i)
interest income earned by such bank or company, or (ii) dividends on assets required to be held by such bank or company, including stock in the Federal Reserve Bank, the Federal Home Loan Bank, or the Federal Agricultural Mortgage Bank or participation certificates issued by a Federal Intermediate Credit Bank.
(F)
Gross receipts from the sales of certain assets
For purposes of this paragraph— (i) Capital assets other than stock and securities In the case of dispositions of capital assets (other than stock and securities), gross receipts from such dispositions shall be taken into account only to the extent of capital gain net income therefrom.
(ii)
In the case of sales or exchanges of stock or securities, gross receipts shall be taken into account only to the extent of the gain therefrom.
(G)
Coordination with section 1374
The amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meanings as when used in section 1374.
.
(2)
(A)
Section 26(b)(2)(J) is amended by striking 25 percent
and inserting 60 percent
.
(B)
Section 1375(b)(1)(A)(i) is amended by striking 25 percent
and inserting 60 percent
.
(C)
The heading for section 1375 is amended by striking 25 percent
and inserting 60 percent
.
(D)
The item relating to section 1375 in the table of sections for part III of subchapter S of chapter 1 is amended by striking 25 percent
and inserting 60 percent
.
(3)
Section 1042(c)(4)(A)(i) is amended by striking section 1362(d)(3)(C)
and inserting section 1375(b)(3)
.
(4)
Section 1362(f)(1)(B) is amended by striking paragraph (2) or (3) of subsection (d)
and inserting subsection (d)(2)
.
(d)
The amendments made by this section shall apply to taxable years beginning after December 31, 2024.
4.
Nonresident alien individuals permitted as S corporation shareholders
(a)
Section 1361(b)(1) is amended by adding and
at the end of subparagraph (B), by striking subparagraph (C), and by redesignating subparagraph (D) as subparagraph (C).
(b)
Gain or loss of nonresident aliens from sale or exchange of S corporation
stock
Section 864(c) is amended by adding at the end the following new paragraph:
(9)
Gain or loss of nonresident aliens from sale or exchange of S
corporation stock
(A)
Notwithstanding any other provision of this subtitle, if a nonresident alien individual owns, directly or indirectly, stock of an S corporation which is engaged in any trade or business within the United States, gain or loss on the sale or exchange of all (or any portion of) such stock shall be treated as effectively connected with the conduct of such trade or business to the extent such gain or loss does not exceed the amount determined under subparagraph (B).
(B)
Amount treated as effectively connected
The amount determined under this subparagraph with respect to any S corporation stock sold or exchanged—
(i)
in the case of any gain on the sale or exchange of the S corporation stock, is—
(I)
the portion of the shareholder’s pro rata share of the amount of gain which would have been effectively connected with the conduct of a trade or business within the United States if the S corporation had sold all of its assets at their fair market value as of the date of the sale or exchange of such stock, or
(II)
zero if no gain on such deemed sale would have been so effectively connected, and
(ii)
in the case of any loss on the sale or exchange of the S corporation stock, is—
(I)
the portion of the shareholder’s pro rata share of the amount of loss on the deemed sale described in clause (i)(I) which would have been so effectively connected, or
(II)
zero if no loss on such deemed sale would have been so effectively connected.
(C)
Application of certain other rules
Except as otherwise provided by the Secretary, rules similar to the rules of subparagraphs (C), (D), and (E) of paragraph (8) shall apply for purposes of this paragraph.
.
(c)
Subchapter A of chapter 3 is amended by adding at the end the following new section:
1447.
Withholding tax on nonresident alien S corporation shareholder’s pro
rata share of effectively connected income
(a)
If— (1) an S corporation has effectively connected taxable income for any taxable year, and
(2)
any shareholder of such S corporation is a nonresident alien,
such S
corporation shall pay a withholding tax under this section at such
time and in such manner as the Secretary may
provide.
(b)
Amount of withholding tax
The amount of the withholding tax payable by any S corporation under subsection (a) shall be equal to the product of—
(1)
the highest rate of tax specified in section 1, multiplied by
(2)
the aggregate pro rata shares of the effectively connected taxable income of such S corporation with respect to shareholders who are nonresident aliens.
(c)
Effectively connected taxable income
For purposes of this section, the term effectively connected taxable income
means the taxable income of the S corporation which is effectively connected (or treated as effectively connected) with the conduct to a trade or business in the United States. For purposes of the preceding sentence, the S corporation shall be allowed a deduction for depletion with respect to oil and gas wells but the amount of such deduction shall be determined without regard to sections 613 and 613A.
(d)
Treatment of nonresident alien shareholders
(1)
Each nonresident alien who is a shareholder of an S corporation shall be allowed a credit under section 33 for such shareholder’s share of the withholding tax paid by the S corporation under this section. Such credit shall be allowed for the shareholder’s taxable year in which (or with which) the S corporation taxable year (for which such tax was paid) ends.
(2)
Credit treated as distributed to shareholder
Except as provided in regulations, a nonresident alien shareholder’s share of any withholding tax paid by the S corporation under this section shall be treated as distributed to such shareholder by such S corporation on the earlier of—
(A)
the day on which such tax was paid by the S corporation, or
(B)
the last day of the S corporation’s taxable year for which such tax was paid.
(e)
Special rules for withholding on dispositions of S corporation
stock
(1)
Except as provided in this subsection, if any portion of the gain (if any) on any disposition of stock in an S corporation would be treated under section 864(c)(9) as effectively connected with the conduct of a trade or business within the United States, the transferee shall be required to deduct and withhold a tax equal to 10 percent of the amount realized on the disposition.
(2)
Exception if nonforeign affidavit furnished; other special
rules
Except as otherwise provided by the Secretary, rules similar to the rules of paragraphs (2) through (6) of section 1446(f) shall apply for purposes of this subsection.
(f)
The Secretary shall prescribed such regulations or other guidance as may be necessary or appropriate to carry out the purposes of this section, including regulations or other guidance providing—
(1)
that for purposes of section 6655, the withholding tax imposed under this section shall be treated as a tax imposed by section 11 and any S corporation required to pay such tax shall be treated as a corporation to which such section applies, and
(2)
appropriate adjustments in applying section 6655 with respect to such withholding tax.
.
(d)
(1)
Section 1361(c)(2)(B)(v) is amended by striking the last sentence.
(2)
Section 6401(b)(2) is amended by inserting or 1447
after section 1446
.
(3)
The table of sections for subchapter A of chapter 3 is amended by adding at the end the following new item:
Sec. 1447. Withholding tax on nonresident alien S corporation
shareholder’s pro rata share of effectively connected
income.
.
(e)
(1)
Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 2024.
(2)
Gain or loss; withholding
The amendments made by subsections (b), (c), (d)(2), and (d)(3) shall apply to sales, exchanges, and dispositions after December 31, 2024.
5.
Employees of a firm counted as a single shareholder toward shareholder limit of
S corporation
(a)
Subsection (c) of section 1361 is amended by adding at the end the following:
(7)
Employees treated as one shareholder
(A)
For purposes of subsection (b)(1)(A), there shall be treated as one shareholder all employees (and their estates) of a corporation and any wholly owned business entities (as determined by the Secretary) of such corporation.
(B)
For purposes of this paragraph, the term employee means any individual that would be an employee described under paragraph (1) or (2) of section 3121(d).
.
(b)
The amendment made by this section shall apply to taxable years beginning after December 31, 2024.
6.
Expansion of S corporation eligible shareholders to include IRAs
(a)
Section 1361(c)(2)(A)(vi) is amended to read as follows: (vi) A trust which constitutes an individual retirement account under section 408(a), including one designated as a Roth IRA under section 408A.
.
(b)
Sale of Stock in IRA Relating to S Corporation Election Exempt From
Prohibited Transaction Rules
Section 4975(d)(16) is amended— (1) by striking subparagraphs (A) and (B) and by redesignating subparagraphs (C), (D), (E), and (F) as subparagraphs (A), (B), (C), and (D), respectively, and
(2)
by striking such bank or company
in subparagraph (A) (as so redesignated) and inserting the issuer of such stock
.
(c)
The amendments made by this section shall take effect on January 1, 2026.
7.
Transfer of suspended losses incident to death
(a)
Section 1366(d)(2)(B) is amended by inserting , or any transfer incident to the death of the transferor,
after any transfer described in section 1041(a)
.
(b)
The amendment made by this section shall apply to transfers incident to deaths occurring after the date of the enactment of this Act.
8.
Repeal of inclusion in gross income of deferred compensation under nonqualified
deferred compensation plans
(a)
Subpart A of part I of subchapter D of chapter 1 is amended by striking section 409A (and by striking the item relating to such section from the table of sections for such subpart).
(b)
(1)
Section 26(b)(2) is amended by striking subparagraph (V) and by redesignating subparagraphs (W) through (Z) as subparagraphs (V) through (Y), respectively.
(2)
Section 430(c)(7)(D)(iv)(I) is amended by inserting as in effect before its repeal
after section 409A
.
(3)
(A)
Section 457A is amended by redesignating subsections (d) and (e) as subsections (e) and (f) and by inserting after subsection (c) the following new subsection:
(d)
Nonqualified deferred compensation plan
For purposes of this section—
(1)
The term nonqualified deferred compensation
plan means—
(A)
any plan that provides for the deferral of compensation, other than—
(i)
a qualified employer plan, and (ii) any bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefit plan, and
(B)
any plan that provides a right to compensation based on the appreciation in value of a specified number of equity units of the service recipient.
(2)
The term qualified employer plan
means—
(A)
any plan, contract, pension, account, or trust described in subparagraph (A) or (B) of section 219(g)(5) (without regard to subparagraph (A)(iii)),
(B)
any eligible deferred compensation plan (within the meaning of section 457(b)), and
(C)
any plan described in section 415(m). (3) Plan includes arrangements, etc The term plan
includes any agreement or arrangement, including an agreement or arrangement that includes one person.
(4)
References to deferred compensation shall be treated as including references to income (whether actual or notional) attributable to such compensation or such income.
(5)
Except as provided by the Secretary, rules similar to the rules of subsections (b) and (c) of section 414 shall apply.
(6)
Treatment of qualified stock
An arrangement under which an employee may receive qualified stock (as defined in section 83(i)(2)) shall not be treated as a nonqualified deferred compensation plan with respect to such employee solely because of such employee's election, or ability to make an election, to defer recognition of income under section 83(i).
.
(B)
Section 457A(e)(3), as redesignated by subparagraph (A), is amended to read as follows:
(3)
Compensation shall not be treated as deferred for purposes of this section if the service provider receives payment of such compensation not later than 12 months after the end of the taxable year of the service recipient during which the right to the payment of such compensation is no longer subject to a substantial risk of forfeiture.
.
(C)
Section 457A(e), as redesignated by subparagraph (A), is amended by striking paragraph (5).
(4)
Section 877A(g)(6) is amended by striking 409A(a)(1)(B),
.
(5)
Section 3401(a) is amended by striking the last sentence. (6) Section 6041 is amended by striking subsection (g).
(7)
Section 6051(a) is amended— (A) by striking paragraph (13) and redesginating paragraphs (14) through (17) as paragraphs (13) through (16), respectively, and
(B)
by striking the last sentence. (c) The amendments made by this section shall apply to taxable years beginning after December 31, 2025.