March 27, 2017

Bill To Modernize S-Corp Regulations Introduced In House And Senate

As MSCI’s partners at the S-Corp Association reported last week, bipartisan, bicameral legislation to reform regulations governing S corporations recently was introduced in Congress. Sen. John Thune (R-SD) and Sen. Benjamin Cardin (D-MD) are sponsoring the S Corporation Modernization Act in the Senate while Rep. Dave Reichert (R-WA) and Rep. Ron Kind are responsible for the bill in the House. Some of the rules that the legislation would modernize were written more than a half-century ago. The full text of the S Corporation Modernization Act is available here and a section-by section analysis can be found here

This legislation would:

  • Expand qualifying beneficiaries of an Electing Small Business Trust (ESBT);
  • Modify passive income rules;
  • Permit individuals to own shares in an S corporation through an individual retirement account (IRA);
  • Treat individual shareholders and ESBTs the same by allowing ESBTs to claim the charitable deduction;
  • Streamline the process for a corporation to elect to be treated as an S corporation by allowing the election to be made on the first tax return that the business files as an S corporation; and
  • Provide a basis adjustment for S corporation assets upon the death of an S corporation shareholder similar to the adjustment available to a partnership when one of its partners passes away.

In a press release, Sen. Cardin explained that the U.S. tax code “has not kept up with the increasingly important role that [S corporations] play” and argued that this legislation would provide “much-needed changes to the tax treatment of S corporations, allowing them to better attract capital, create jobs, and make charitable investments in their communities.”