S Corporation Modernization Act of 2026

Key Points

• This bill changes the rules for S corporations, which are businesses that pass their profits directly to owners instead of paying a separate corporate tax. It would allow these companies to have up to 250 shareholders, which is more than double the current limit of 100.
• The plan makes it easier for employees to own a piece of the company where they work. Under the new rules, all employees who own stock would count as just one shareholder toward the 250 person limit. This helps businesses offer stock to more workers without breaking federal rules.
• It expands who can own these businesses by allowing Individual Retirement Accounts (IRAs) and people who live outside the United States to become shareholders. Currently, these groups are mostly blocked from owning S corporation stock.
• The bill changes how these businesses are taxed on passive income, such as money made from rent or interest. It raises the limit on this type of income from 25 percent to 60 percent before extra taxes kick in, giving businesses more flexibility in how they make money.
• When a business owner dies, the bill creates a new tax deduction for the people who inherit the stock. This is designed to help family owned businesses stay open and manage tax bills after a leader passes away.

Impact Analysis

Govbase has not yet run an impact analysis on this legislation.