S Corporation Modernization Act of 2017

To amend the Internal Revenue Code of 1986 to provide for S corporation reform, and for other purposes. 1. Short title; reference; table of contents (a) Short Title This Act may be cited as the S Corporation Modernization Act of 2017 (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. (c) Table of contents The table of contents for this Act is as follows: Sec. 1. Short title; reference; table of contents. Sec. 2. Expansion of qualifying beneficiaries of an electing small business trust. Sec. 3. Modifications to S corporation passive investment income rules. Sec. 4. Expansion of S corporation eligible shareholders to include IRAs. Sec. 5. Charitable contribution deduction for electing small business trusts. Sec. 6. Amortization of S corporation built-in gain amount upon death of shareholder. Sec. 7. Extension of time for making S corporation elections. 2. Expansion of qualifying beneficiaries of an electing small business trust (a) No look-Through for eligibility purposes Section 1361(c)(2)(B)(v) 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, 2018. 3. Modifications to S corporation passive investment income rules (a) Increased percentage limit Section 1375(a)(2) 25 percent 60 percent (b) Repeal of excessive passive income as a termination event Section 1362(d) (c) Conforming amendments (1) Section 1375(b) (3) Passive investment income defined (A) In general Except as otherwise provided in this paragraph, the term passive investment income (B) Exception for interest on notes from sales of inventory The term passive investment income (C) Treatment of certain lending or finance companies If the S corporation meets the requirements of section 542(c)(6) for the taxable year, the term passive investment income (D) Treatment of certain dividends If an S corporation holds stock in a C corporation meeting the requirements of section 1504(a)(2), the term passive investment income (E) Exception for banks, etc In the case of a bank (as defined in section 581) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act ( 12 U.S.C. 1813(w)(1) passive investment income (i) interest income earned by such bank or company, or (ii) dividends on assets required to be held by such bank or company, including stock in the Federal Reserve Bank, the Federal Home Loan Bank, or the Federal Agricultural Mortgage Bank or participation certificates issued by a Federal Intermediate Credit Bank. (F) Gross receipts from the sales of certain assets For purposes of this paragraph— (i) Capital assets other than stock and securities In the case of dispositions of capital assets (other than stock and securities), gross receipts from such dispositions shall be taken into account only to the extent of capital gain net income therefrom. (ii) Stock and securities In the case of sales or exchanges of stock or securities, gross receipts shall be taken into account only to the extent of the gain therefrom. (G) Coordination with section 1374 The amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meanings as when used in section 1374. . (2) (A) Section 26(b)(2)(J) 25 percent 60 percent (B) Section 1375(b)(1)(A)(i) 25 percent 60 percent (C) The heading for section 1375 25 percent 60 percent (D) The item relating to section 1375 in the table of sections for part III of subchapter S of chapter 1 25 percent 60 percent (3) Section 1042(c)(4)(A)(i) section 1362(d)(3)(C) section 1375(b)(3) (4) Section 1362(f)(1)(B) paragraph (2) or (3) of subsection (d) subsection (d)(2) (d) Effective Date The amendments made by this section shall apply to taxable years beginning after December 31, 2017. 4. Expansion of S corporation eligible shareholders to include IRAs (a) In General Section 1361(c)(2)(A)(vi) (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 Section 4975(d)(16) (1) by striking subparagraphs (A) and (B) and by redesignating subparagraphs (C), (D), (E), and (F) as subparagraphs (A), (B), (C) and (D), respectively, and (2) by striking such bank or company the issuer of such stock (c) Effective Date The amendments made by this section shall take effect on January 1, 2018. 5. Charitable contribution deduction for electing small business trusts (a) In general Section 641(c)(2) (E) (i) Section 642(c) shall not apply. (ii) For purposes of section 170(b)(1)(G), adjusted gross income shall be computed in the same manner as in the case of an individual, except that the deductions for costs which are paid or incurred in connection with the administration of the trust and which would not have been incurred if the property were not held in such trust shall be treated as allowable in arriving at adjusted gross income. . (b) Effective date The amendment made by this section shall apply to taxable years beginning after December 31, 2017. 6. Amortization of S corporation built-in gain amount upon death of shareholder (a) In general Part II of subchapter S of chapter 1 1369. Amortization of built-in gain amount upon death of shareholder (a) In general A person holding stock in an electing S corporation the basis of which is determined under section 1014(a) (hereafter in this section referred to as the shareholder (b) S corporation built-In gain amount For purposes of this section, the term S corporation built-in gain amount (1) the excess (if any) of— (A) the basis of the stock referred to in subsection (a) as determined under section 1014(a), over (B) the adjusted basis of such stock immediately before the death of the decedent, or (2) the pro rata share (determined as of the applicable valuation date) of— (A) the aggregate fair market value of all property held by the S corporation which is of a character subject to depreciation or amortization, over (B) the aggregate adjusted basis of all such property held by the S corporation as of such date. (c) Electing S corporation For purposes of this section, the term electing S corporation (d) Applicable valuation date For purposes of this section, the term applicable valuation date (1) in the case of a decedent with respect to which the executor of the decedent’s estate elects the application of section 2032, the date 6 months after the decedent’s death, and (2) in the case of any other decedent, the date of the decedent’s death. (e) Accelerated deduction in case of disposition of S corporation property (1) In general If the electing S corporation disposes of any property which was taken into account under subsection (b)(2), then the deduction allowed under subsection (a) with respect to any stock, for the taxable year of the shareholder in which or with which the taxable year of the S corporation which includes the date of such disposition ends, shall (except as otherwise provided in this section) not be less than the lesser of— (A) the pro rata share of the gain recognized on such disposition, or (B) the amount determined under subsection (b)(2) by only taking into account such property. (2) Overall allowance not increased No deduction shall be allowed under subsection (a) with respect to any stock for any taxable year to the extent that such deduction (when added to the deductions so allowed for all prior taxable years) exceeds the S corporation built-in gain amount with respect to such stock. (f) Recharacterization of gains as ordinary income to extent of deduction If— (1) stock of an S corporation with respect to which a deduction was allowed under this section, or (2) property which was taken into account under subsection (b)(2) with respect to such stock, is disposed of at a gain (determined without regard to whether or not such gain is recognized and reduced by any amount of gain which is treated as ordinary income under any other provision of this subtitle), the amount of such gain (or the shareholder’s pro rata share of such gain in the case of property described in paragraph (2)) shall be treated as gain which is ordinary income (and shall be recognized notwithstanding any other provision of this subtitle) to the extent of the excess of the aggregate deductions allowable under this section with respect to such stock for the taxable year of such disposition and all prior taxable years over the amounts taken into account under this subsection for all prior taxable years. (g) Termination of amortization No deduction shall be allowed under subsection (a) with respect to any stock in an electing S corporation with respect to any period beginning after the earlier of— (1) the date on which the corporation’s election under section 1362 terminates, or (2) the date on which the shareholder transfers such stock to any other person. (h) Treatment of certain transfers (1) Distributions from estates or trusts Notwithstanding any other provision of this section, in the case of a distribution of stock from an estate or trust to a beneficiary, the beneficiary (and not the estate or trust) shall be treated as the shareholder to which this section applies with respect to periods after such distribution. (2) Certain transfers involving spouses Notwithstanding any other provision of this section, in the case of a transfer described in section 1041, the transferee (and not the transferor) shall be treated as the shareholder to which this section applies with respect to periods after such transfer. (i) Treatment of income in respect of the decedent (1) Adjustment to built-in gain of property held by S corporation For purposes of subsection (b)(2), the fair market value of any property taken into account under subparagraph (A) thereof shall be decreased by any amount of income in respect of the decedent with respect to such property to which section 691 applies. For purposes of subsection (e)(1)(A), the gain recognized on the disposition of such property shall be reduced by such amount. (2) Adjustment to basis of S corporation stock For adjustment to basis of S corporation stock, see section 1367(b)(4)(B). (j) Reporting Except as otherwise provided by the Secretary, for purposes of section 6037, the amounts determined under subsections (b)(2), (e)(1), and (f)(2) shall be treated as items of the corporation and the pro rata share determined under such subsection shall be furnished to the shareholder under section 6037(b). . (b) Adjustment to basis of stock (1) In general Section 1367(a)(2) and , and (F) the amount of the shareholder’s deduction under section 1369. . (2) Adjustment not taken into account in determining treatment of distributions Section 1368 (A) in subsection (d)(1), by inserting (other than subsection (a)(2)(F) thereof) section 1367 (B) in subsection (e)(1)(A)— (i) by striking this title and the phrase this title, the phrase (ii) by inserting , and no adjustment shall be made under section 1367(a)(2)(F) section 1367(a)(2) (c) Clerical amendment The table of sections for part II of subchapter S of chapter 1 Sec. 1369. Amortization of built-in gain amount upon death of shareholder. . (d) Effective date The amendments made by this section shall apply to with respect to decedents dying after the date of the enactment of this Act, in taxable years ending after such date. 7. Extension of time for making S corporation elections (a) In general Subsection (b) of section 1362 (b) When made (1) In general An election under subsection (a) may be made by a small business corporation for any taxable year not later than the due date for filing the return of the S corporation for such taxable year (including extensions). (2) Certain elections treated as made for next taxable year If— (A) an election under subsection (a) is made for any taxable year within the period described in paragraph (1), but (B) either— (i) on one or more days in such taxable year and before the day on which the election was made the corporation did not meet the requirements of subsection (b) of section 1361, or (ii) one or more of the persons who held stock in the corporation during such taxable year and before the election was made did not consent to the election, then such election shall be treated as made for the following taxable year. (3) Authority to treat late elections, etc., as timely If— (A) an election under subsection (a) is made for any taxable year after the date prescribed by this subsection for making such election for such taxable year or no such election is made for any taxable year, and (B) the Secretary determines that there was reasonable cause for the failure to timely make such election, the Secretary may treat such an election as timely made for such taxable year. (4) Election on timely filed returns Except as otherwise provided by the Secretary, an election under subsection (a) for any taxable year may be made on a timely filed return of the S corporation for such taxable year. (5) Secretarial authority The Secretary may prescribe such regulations, rules, or other guidance as may be necessary or appropriate for purposes of applying this subsection. . (b) Coordination with certain other provisions (1) Qualified subchapter S subsidiaries Section 1361(b)(3)(B) Rules similar to the rules of section 1362(b) shall apply with respect to any election under clause (ii). . (2) Qualified subchapter S trusts Section 1361(d)(2) (c) Revocations Paragraph (1) of section 1362(d) (1) by striking subparagraph (D) subparagraphs (D) and (E) (2) by adding at the end the following new subparagraph: (E) Authority to treat late revocations as timely If— (i) a revocation under subparagraph (A) is made for any taxable year after the date prescribed by this paragraph for making such revocation for such taxable year or no such revocation is made for any taxable year, and (ii) the Secretary determines that there was reasonable cause for the failure to timely make such revocation, the Secretary may treat such a revocation as timely made for such taxable year. . (d) Effective date (1) In general Except as otherwise provided in this subsection, the amendments made by this section shall apply to elections for taxable years beginning after December 31, 2017. (2) Revocations The amendments made by subsection (c) shall apply to revocations after December 31, 2017.

Summary: S Corporation Modernization Act of 2017 This bill amends the Internal Revenue Code, with respect to the tax treatment of S corporations, to: allow a nonresident alien to be a qualifying beneficiary of an electing small business trust (ESBT), which is a type of trust that is permitted to hold shares in an S corporation; allow S corporations to increase passive investment income from 25% to 60% without incurring additional taxes; eliminate a provision terminating the S corporation status of corporations with excessive passive income for three consecutive years; allow any S corporation bank to have individual retirement account shareholders; allow ESBTs to claim expanded tax deductions for charitable contributions; allow an adjustment to the basis of an S corporation's assets upon the death of a shareholder, in the form of a 15-year amortization deduction; and extend the time period for making S corporation elections.