S Corporation Modernization Act of 2013

To amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes. 1. Short title, reference (a) Short Title This Act may be cited as the S Corporation Modernization Act of 2013 (b) Amendment of 1986 Code Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986. 2. Reduced recognition period for built-in gains made permanent (a) In general Paragraph (7) of section 1374(d) (relating to definitions and special rules) is amended to read as follows: (7) Recognition period The term recognition period . (b) Effective date The amendment made by this section— (1) shall apply for purposes of determining the recognition period with respect to 1st days referred to in section 1374(d)(7) (2) shall not apply for purposes of determining the tax imposed by section 1374 of such Code for taxable years ending before such date. 3. Repeal of excessive passive investment income as a termination event (a) In general Paragraph (3) of section 1362(d) (relating to termination) is amended by adding at the end the following new subparagraph: (D) Termination This paragraph shall not apply to taxable years beginning after December 31, 2012. . (b) Effective Date The amendment made by this section shall apply to taxable years beginning after December 31, 2012. 4. Modifications to passive income rules (a) Increased Limit (1) In general Paragraph (2) of section 1375(a) (relating to tax imposed when passive investment income of corporation having accumulated earnings and profits exceeds 25 percent of gross receipts) is amended by striking 25 percent 60 percent (2) Conforming amendments (A) Subparagraph (J) of section 26(b)(2) is amended by striking 25 percent 60 percent (B) Clause (i) of section 1375(b)(1)(A) is amended by striking 25 percent 60 percent (C) The heading for section 1375 is amended by striking 25 percent 60 percent (D) The table of sections for part III of subchapter S of chapter 1 is amended by striking 25 percent 60 percent (b) Effective date The amendments made by this section shall apply to taxable years beginning after December 31, 2012. 5. Expansion of qualifying beneficiaries of an electing small business trust (a) No Look Through for Eligibility Purposes Clause (v) of section 1361(c)(2)(B) (relating to treatment as shareholders) is amended by adding at the end the following new sentence: This clause shall not apply for purposes of subsection (b)(1)(C). (b) Effective date The amendment made by this section shall take effect on January 1, 2013. 6. Expansion of S corporation eligible shareholders to include IRAs (a) In General Clause (vi) of section 1361(c)(2)(A) (relating to certain trusts permitted as shareholders) is amended to read as follows: (vi) A trust which constitutes an individual retirement account under section 408(a), including one designated as a Roth IRA under section 408A. . (b) Sale of Stock in IRA Relating to S Corporation Election Exempt From Prohibited Transaction Rules Paragraph (16) of section 4975(d) (relating to exemptions) is amended to read as follows: (16) a sale of stock held by a trust which constitutes an individual retirement account under section 408(a) to the individual for whose benefit such account is established if— (A) such sale is pursuant to an election under section 1362(a) by the issuer of such stock, (B) such sale is for fair market value at the time of sale (as established by an independent appraiser) and the terms of the sale are otherwise at least as favorable to such trust as the terms that would apply on a sale to an unrelated party, (C) such trust does not pay any commissions, costs, or other expenses in connection with the sale, and (D) the stock is sold in a single transaction for cash not later than 120 days after the S corporation election is made. . (c) Effective Date The amendments made by this section shall take effect on January 1, 2013. 7. Allowance of deduction for charitable contributions for electing small business trusts (a) In general Section 641(c)(2)(C) (relating to modifications) is amended by adding at the end the following new sentence: The deduction for charitable contributions allowed under clause (i) shall be determined without regard to section 642(c), and the limitations imposed by section 170(b)(1) on the amount of the deduction shall be applied to the electing small business trust as if it were an individual. (b) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2012. 8. Permanent rule regarding basis adjustment to stock of S corporations making charitable contributions of property (a) In general Section 1367(a)(2) (relating to decreases in basis) is amended by striking the last sentence. (b) Effective date The amendment made by this section shall apply to contributions made in taxable years beginning after December 31, 2012.

Summary: S Corporation Modernization Act of 2013 - Amends the Internal Revenue Code to revise the tax treatment of S corporations by: (1) permanently reducing from 10 to 5 years the period during which S corporation built-in gains are subject to tax; (2) repealing mandatory termination of S corporation elections for excessive passive investment income; (3) allowing S corporations to increase passive investment income from 25 to 60% without incurring additional tax; (4) allowing nonresident aliens to be potential current beneficiaries of an electing small business trust (ESBT); (5) allowing individual retirement accounts (IRAs) to be S corporation shareholders; (6) allowing ESBTs to claim expanded charitable tax deductions; and (7) making permanent the rule requiring a basis adjustment to stock of an S corporation making charitable contributions of property.