S Corporation Modernization Act of 2025
Sponsored By: Senator Sheehy, Tim [R-MT]
Introduced
Summary
This bill would let heirs claim a new, long-term deduction for an S corporation shareholder's built-in gains at death to reduce immediate tax on stepped-up basis. It also would create a withholding system for nonresident alien shareholders and update who can count as S corporation shareholders.
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Bill Overview
Analyzed Economic Effects
5 provisions identified: 3 benefits, 0 costs, 2 mixed.
15-year tax relief for S corp heirs
This bill would let heirs or estates of S corporation shareholders amortize certain built-in gains over 15 years. The S corporation must elect the rule for the shareholder. If the S corp sells built-in-gain property, some remaining deductions can be accelerated and past excess deductions can be recaptured as ordinary income. The amount and election must be reported by the corporation. The rule would apply to decedents dying after enactment.
New rules for deferred executive pay
This bill would repeal section 409A and replace it with a new statutory framework for nonqualified deferred compensation for tax years after December 31, 2025. It would redefine covered plans, add aggregation rules, treat notional earnings as includible, and create a 12‑month exception for short deferrals. Employers and participants would face new qualification rules, timing tests, and compliance requirements. Transitional rules and Treasury guidance are expected.
IRAs allowed to own S stock
This bill would allow individual retirement accounts, including Roth IRAs, to be S corporation shareholders starting January 1, 2026. It would change related prohibited-transaction language so IRAs can hold S stock as eligible shareholders. This could let retirement accounts more often buy and hold S-corp shares.
Higher passive-income limit for S corps
This bill would raise the passive investment income threshold for S corporations from 25% to 60% for tax years after December 31, 2024. It would repeal the rule that treated excessive passive income as causing an S election to terminate. The bill also expands the definition of passive receipts but lists many exceptions and excludes recognized built-in gain during the recognition period.
Noncitizen S corp ownership and withholding
This bill would allow nonresident alien individuals to be S corporation shareholders for tax years after December 31, 2024. At the same time, S corporations with U.S.-connected income would have to withhold tax equal to the top individual rate on the NRA shareholders' share of that income. Transferees who buy S stock would generally have to withhold 10% of the amount realized on dispositions that are U.S.-connected. Nonresident shareholders would get a U.S. credit for the withholding. Treasury would issue rules to implement these changes.
Sponsors & CoSponsors
Sponsor
Sheehy, Tim [R-MT]
MT • R
Cosponsors
There are no cosponsors for this bill.
Roll Call Votes
No roll call votes available for this bill.
View on Congress.gov