S Corporation Modernization Act of 2026
Sponsored By: Representative Carey, Mike [R-OH-15]
Introduced
Summary
This bill modernizes S corporation tax rules by changing how built‑in gains at a shareholder's death are handled, raising the passive income cap, and letting nonresident aliens be S shareholders.
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Bill Overview
Analyzed Economic Effects
5 provisions identified: 3 benefits, 0 costs, 2 mixed.
Tax relief for inherited S shares
This bill would let estates, trusts, and other transferees of S-corp stock claim a new deduction for built-in gain that arises when the stock gets a step-up in basis at death. The amortizable portion would be written off over 15 years starting in the month of the valuation date. Special rules would limit extra deductions when the underlying property is sold and would lower stock basis as deductions are taken. The rule would apply for decedents dying after enactment and in taxable years ending after enactment.
More people can be S shareholders
The bill would raise the S-corporation shareholder cap from 100 to 250 starting for tax years after December 31, 2026. It would also treat all employees (and their estates) of a firm and its wholly owned units as one shareholder for tax years after December 31, 2025. In addition, individual retirement accounts, including Roth IRAs, would be allowed to hold S-corp stock starting January 1, 2027. These changes would let more owners and retirement accounts hold S stock without losing S status.
Higher passive income limit for S corporations
The bill would raise the passive-investment-income threshold used for S corporations from 25 percent to 60 percent of gross receipts for tax years starting after December 31, 2025. It would also narrow what counts as passive income, exclude some bank and lending items and certain dividends, and stop treating excess passive income as an automatic S-election termination. These changes would make it easier for S corporations to hold passive receipts without risking S status.
Changes to deferred compensation tax rules
If enacted, the bill would repeal section 409A and replace it with revised rules in section 457A that define nonqualified deferred compensation plans, set plan-aggregation and earnings rules, and add a 12-month exception for payments within 12 months after the end of the service recipient's tax year. These changes would apply for taxable years beginning after December 31, 2026. Affected workers and employers would face different tax timing and reporting rules for deferred pay.
Withholding rules for nonresident shareholders
The bill would treat gains on S-corp stock sales by nonresident individuals as U.S.-connected income to the extent of a pro rata deemed U.S. gain. S corporations with nonresident shareholders would have to withhold an amount equal to the top individual tax rate times the nonresident shareholders' share of the S corp's U.S.-connected taxable income for tax years after December 31, 2025. Buyers (transferees) generally would have to withhold 10 percent of the amount realized on sales after December 31, 2025, when some gain is U.S.-connected. Nonresident shareholders could claim a credit for withholding on their U.S. return, but the new withholding could create cash-flow costs and deal holdbacks.
Sponsors & CoSponsors
Sponsor
Carey, Mike [R-OH-15]
OH • R
Cosponsors
There are no cosponsors for this bill.
Roll Call Votes
No roll call votes available for this bill.
View on Congress.gov