Business / Tax

S Corporation Reform

Issue
Subchapter S of the Internal Revenue Code (S corporations) was enacted in 1958 to provide entrepreneurs the advantage of corporate protection from liability, along with the single level of taxation enjoyed by partnerships and limited liability companies. However, the S corporation statute contains a variety of limitations, restrictions, and pitfalls for the unwary. Even though some very important improvements have been made over the years, more needs to be done to bring the tax treatment of these important businesses into the twenty-first century.

ACEC strongly supported provisions included in the American Jobs Creation Act of 2004 (P.L. 108-357) to simplify the tax treatment of S corporations and to make it easier for businesses to qualify as S corporations. The law increases the number of eligible shareholders from 75 to 100, treats all family members within six generations as one shareholder, and allows distributions from an employee stock benefit plan (ESOP) held by an S corporation for the purposes of repaying a loan used to purchase employer securities without losing ESOP qualification or violating rules against prohibited transactions.

Additional reforms can be enacted that will simplify the tax treatment of S corporations and make it easier for businesses to qualify as S corporations.

ACEC Position
ACEC supports the S Corporation Modernization Act of 2009 (H.R. 2910), sponsored by Representatives Ron Kind (D-WI) and Dave Reichert (R-WA), which would reduce ownership restrictions and ease punitive rules that apply to converted S corporations.